U.S. Dollars


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                ----------------

                                    FORM 10-K
(Mark One)
[x] ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [FEE REQUIRED] for the fiscal year ended December 29, 1996
                                       OR
[ ] TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES 
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
              For the transition period from ____________ to _________________

                         Commission file number 0-17980
                                 --------------
                            RALLY'S HAMBURGERS, INC.
             (Exact name of registrant as specified in its charter)

     Delaware                                               62-1210077
(State or other jurisdiction of                       (I.R.S. Employer ID No.) 
incorporation or organization)                 

          10002 Shelbyville Road, Suite 150, Louisville, Kentucky 40223
               (Address of principal executive offices)       (Zip Code)

       Registrant's telephone number, including area code: (502) 245-8900

<TABLE>
<CAPTION>
                                                                                           Name of Each Exchange
                                                                   Title of Class             on which Registered
                                                                ----------------------    ----------------------------
<S>                                                             <C>                       <C>                           
   Securities registered pursuant to 12(b) of the Act:          9 7/8% Senior Notes       New York Stock Exchange
                                                                due 2000
   Securities registered pursuant to 12(g) of the Act:          Common Stock, par         NASDAQ -- NMS
                                                                value $.10 per share
   Securities registered pursuant to 12(g) of the Act:          Common Stock              NASDAQ -- NMS
                                                                Purchase Warrants
</TABLE>
  
   Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. 

                                     Yes [x]  No [ ]

     The number of shares  outstanding  of the  Registrant's  Common Stock as of
February  24, 1997 was  20,541,602  shares.  The  aggregate  market value of the
shares of Registrant  held by  non-affiliates  of the  Registrant,  based on the
closing  price of such stock on the National  Market  System of the NASDAQ Stock
Market,  as of February 24 1997 was approximately  $45,042,594.  For purposes of
the foregoing  calculation  only,  all  directors and executive  officers of the
Registrant have been deemed affiliates.

     Portions of the Registrants' Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorported by reference in Part III of this Form 10-K.
                                     
<PAGE>



<TABLE>
<CAPTION>
                                                 TABLE OF CONTENTS


     <S>                                                                                                    <C>    
     PART I                                                                                                 Page No.

     Item 1.      Business.....................................................................................3

     Item 2.      Properties..................................................................................10

     Item 3.      Legal Proceedings...........................................................................10

     Item 4.      Submission of Matters to a Vote of Security Holders.........................................13

     
     PART II

     Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters.......................13

     Item 6.      Selected Consolidated Financial Data........................................................14

     Item 7.      Management's Discussion and Analysis of Financial Condition and Results of Operations.......15

     Item 8.      Financial Statements and Supplementary Data.................................................27

     Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.......50


     PART III

     Item 10.     Directors, Executive Officers, Promoters and Control Persons of the Registrant..............50

     Item 11.     Executive Compensation......................................................................50

     Item 12.     Stock Ownership of Principal Holders and Management.........................................50

     Item 13.     Certain Relationships and Related Transactions..............................................50


     PART IV

     Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................50

</TABLE>
                                       2
<PAGE>


                                     PART I


Item 1.    Business

General

     Rally's Hamburgers,  Inc. and its subsidiaries are collectively  referred 
to herein as the context requires as "Rally's" or the "Company".  See Note 1 to 
Consolidated Financial Statements.

     Rally's is one of the largest  chains of double  drive-thru  restaurants in
the United  States.  At February  24,  1997,  the Rally's  system  included  471
restaurants in 19 states, primarily in the Midwest and the Sunbelt, comprised of
214 Company-owned and operated, 230 franchised and 27 Company-owned  restaurants
in Western markets which are operated as Rally's restaurants by CKE Restaurants,
Inc.  ("CKE"),  a  significant  shareholder  of the Company,  under an operating
agreement which began July 1996. One additional  Company-owned  store covered by
the operating  agreement has been  converted to the Carl's Jr. format and is not
included in the above store count.  The remaining 27 restaurants are included in
the franchised store count herein. The Company's  restaurants offer high quality
fast food.  The  Company  serves the  drive-thru  and  take-out  segments of the
quick-service  restaurant  industry.  The Company opened its first restaurant in
January 1985 and began offering  franchises in November 1986. See  "Management's
Discussion and Analysis of Financial Condition and Result of Operations."

     On March 25, 1997, the Company agreed in principle to a merger  transaction
pursuant to which the COmpany would become a wholly-owned subsidiary of Checkers
Drive-In  Restaurants,  Inc.,  a Delaware  corporation  ("Checkers").  Checkers,
together with its  franchisees,  operates  approximately  478 double  drive-thru
hamburger restaurants primarily located in the Southeastern United States. Under
the terms of the letter of intent  executed by the Company  and  Checkers,  each
share of the  Company's  Common  Stock will be  converted  into three  shares of
Checker's  common stock upon  consummation  of the merger.  The  transaction  is
subject to negotiation of definitive agreements,  recipt of fairness opinions by
each  party,  receipt of  stockholder  and other  required  approvals  and other
customary conditions.

Cautionary Statement

     Information provided herein by the Company contains,  and from time to time
the Company  may  disseminate  material  and make  statements  which may contain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). These cautionary statements are being
made  pursuant to the  provisions of the Act and with the intention of obtaining
the benefits of the "safe harbor"  provisions  of the Act. The Company  cautions
investors  that  any  forward-looking  statements  made by the  Company  are not
guarantees of future  performance and that actual results may differ  materially
from those in the  forward-looking  statements  as a result of various  factors,
including but not limited to, the following:

         (i)  The Company  competes with numerous well  established  competitors
              who have  substantially  greater  financial  resources  and longer
              operating   histories   than   the   Company.   Competitors   have
              increasingly  offered  selected food items and combination  meals,
              including   hamburgers,   at  discounted   prices,  and  continued
              discounting  by  competitors  may  adversely  affect  revenues and
              profitability of Company restaurants.

         (ii) The Company will be  negatively  impacted if the Company is unable
              to reverse  declining  same store sales.  Sales  increases will be
              dependent,  among other things, on success of Company  advertising
              and promotion of new and existing menu items. No assurances can be
              given  that  such  advertising  and  promotions  will  in  fact be
              successful.

         (iii)The  Company  may also be  negatively  impacted  by other  factors
              common to the  restaurant  industry  such as changes  in  consumer
              tastes, away from red meat and fried foods; increases in the costs
              of food,  paper,  labor,  health care,  worker's  compensation  or
              energy;  an  inadequate  number of hourly paid  employees;  and/or
              decreases in the availability of affordable capital resources.


                                       3
<PAGE>

Concept and Strategy

     The  Company's  primary  strategy is to serve the  drive-thru  and take-out
segment  of the  quick-service  restaurant  industry.  The  Company's  operating
strategy is to take  advantage  of  off-premise  food  consumption  by serving a
limited menu  consisting of a variety of great tasting burgers with limited side
items.  The  key  elements  of  this  strategy  are  Rally's  operating  system,
restaurant design, brand positioning and marketing program.
                                    
     Rally's  Operating  System.  The  Rally's  operating  system is designed to
provide  fast and  accurate  service  of high  quality  fast  food.  Within  the
restaurants,  all products are prepared to order in a systematic  fashion moving
from  the  back of the  restaurant  to the  front  windows  with  each  employee
performing specific duties.  Labor is staffed in an attempt to courteously serve
guests within 45 seconds of their reaching the drive-thru window and to maintain
a safe,  clean food service  environment.  The Company's  training and franchise
support  programs  are  designed to promote  consistency  of product and service
throughout  the  Rally's  system and are  documented  in a uniform  confidential
operations manual.

     The  Company  installed  computer-based  point of sale  devices and related
software  in each  of its  Company-owned  restaurants  in 1993  and  1994.  This
software allows Rally's to centralize control over certain aspects of restaurant
operations at the corporate  office on a daily basis.  As a result,  menu prices
and menus can be controlled and  transactions  reviewed and audited at corporate
headquarters.

     The Company  continued  to update and improve  its  restaurant  back office
software  in 1995  and  1996.  Modules  such as time and  attendance,  inventory
management and daily variance  reporting  either have been or are in the process
of being rolled into all Company locations. The Company believes that the system
is  providing  current  data on a daily  basis that is used to analyze  and make
decisions about the business.

     Restaurant Design and Economics.  Rally's restaurants present a distinctive
design which conveys a message of "clean and fast" to the passing motorist.  The
restaurants'  typical "double  drive-thru" design features drive-thru windows on
both  sides  of the  restaurant  for  quicker  service.  While  the  restaurants
generally  do not have an interior  dining  area,  most have a patio for outdoor
eating. These areas contain canopy tables and seats and are landscaped to create
an attractive eating  environment.  Rally's restaurant  buildings average 600 to
720 square feet  depending  upon  geographic  location and require less property
than the traditional  eat-in  restaurants.  As a result of the small size of the
restaurant  building,  Rally's  restaurants  generally require a smaller capital
investment  and have lower  occupancy and operating  costs per  restaurant  than
traditional dine-in fast feeders. The size of the facility also permits somewhat
greater  flexibility  with  respect to the  selection of  prospective  sites for
restaurants.

     During 1996, the Company opened six new  restaurants.  The incremental cash
outlay,  exclusive of land, of opening these  restaurants was reduced due to the
substantial  use of  surplus  assets  as well  as to the  types  of  restaurants
constructed   (stick  versus   modular  versus   conversions   of   pre-existing
restaurants). In total, the incremental cash outlay, exclusive of land, of these
six restaurants was approximately $1,225,000.

     In 1994, the full development cost associated with constructing and opening
a Rally's  restaurant  (excluding  land cost and interest on  construction)  was
approximately $478,000.  When purchased,  the majority of real estate sites have
cost between $100,000 and $300,000.  As of February 24, 1997,  approximately 69%
of Company-owned and operated restaurants were located on leased real estate.

     Over the past year,  the Company has been  building  stores by either using
surplus  equipment  and/or surplus  modular  buildings or purchasing  conversion
properties.  When using surplus equipment and modular  buildings,  the Company's
cash outlay has typically  been  approximately  $250,000.  The Company  recently
acquired four conversion  properties.  The Company's total cost, including land,
building, equipment and conversion cost is expected to be less than $250,000 per
store.  The  Company  is  currently   working  on  several  similar   conversion
opportunities.  Although the Company  expects to continue to use excess  modular
buildings and seek additional  conversion  opportunities,  the Company estimates
that the cost  associated with new store  development  will return to the higher
pre-slowdown levels where these alternatives are not practical.

                                       4
<PAGE>

     Brand  Positioning:  Bigger,  Better  Burgers.  Rally's is  establishing  
an overall brand  positioning as THE quick service restaurant chain serving a 
variety of great tasting burgers.  This positioning is supported by:

     1. A limited menu based on high quality burgers, french fries, onion rings 
        and soft drinks/shakes.
     2. New visually attractive menu boards that merchandise these high quality 
        burgers by utilizing high definition photographs of the featured menu 
        offerings.
     3. Television advertising featuring big, juicy burgers and targeting 
        Rally's heavy users.
                                    
     This new brand  positioning  represents a major strategic shift for Rally's
away from its recent  positioning  which had been based  primarily on low prices
and quick service.  Good value and quick service are still  important to guests,
but the competitive environment has become so price oriented that basing a brand
positioning on low prices is not unique enough to differentiate Rally's from its
competitors.  Further, relying too heavily on low prices and price promotion had
a negative financial impact on the Company, causing higher costs as a percentage
of sales and lower  profits.  By focusing the brand  positioning on what Rally's
believes  guests really want from a quick service  hamburger  restaurant  and on
what Rally's can effectively  provide - great tasting burgers - Rally's believes
that it will be able to effectively  differentiate  itself from its  competitors
and improve its sales and guest count trends over time.

      Rally's has increased  the size of its hamburger  patty from 2.8 ounces to
3.2 ounces,  reformulated its spice profile and added two new signature  burgers
to its  product  line - The Super  Double and the  Barbecue  Bacon  Cheeseburger
(single and double). These new products,  along with a bigger Rallyburger(R) and
Big Buford(TM) double cheeseburger, currently represent the core burger line-up.
Additionally,  the Company offers its One of a Kind  Fries(R),  a chicken breast
sandwich, onion rings, Coca-Cola(R) brand soft drinks and milk shakes. A limited
number of  additional  products  may be offered in some  locations  from time to
time.

     Marketing Program.  Rally's introduced a new advertising campaign initially
in three Company markets in late 1996 and in all Company  controlled  markets in
late February 1997 to support the new brand  positioning.  This new  advertising
was created by the Company's  advertising agency,  Mendelsohn/Zien  Advertising,
and was  based  on an  extremely  successful  advertising  campaign  the  agency
developed for the California-based  Carl's Jr. chain. Rally's has entered into a
marketing-sharing  agreement  with  CKE  restaurants  covering  the use of these
commercials. Under the agreement, the cost of the commercials is lower than that
of developing  similar unique  creative for the Company's use. The  advertising,
which  uses the  theme-line  "If it doesn't  get all over the place,  it doesn't
belong in your face," features Rally's new signature burgers and targets a heavy
user market segment of young adults aged 18-34.  This new  advertising  campaign
relies  heavily on television as its primary  medium.  In cases where  effective
levels of television are not affordable,  the Company may use radio,  outdoor or
print advertising.

Working Capital

     The  Company's  working  capital  requirements  are  generally  typical  of
companies within the  quick-service  restaurant  industry.  The Company does not
normally  require large amounts of working capital to maintain  operations since
sales  are for  cash,  purchases  are on open  accounts  and  meat  and  produce
inventories are limited to a two to four day supply to assure freshness.  During
1995 and 1996, the Company's  working capital  requirements  were  substantially
reduced as a result of significant  slowdowns in construction  from prior years.
Additionally,  sales  of  certain  assets  held  for  sale,  net  of  underlying
encumbrances,  provided  another source of working  capital.  See  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Franchising Program; Area Development Rights

     The  Company  offers  area   development   agreements  to  franchisees  for
construction of one or more new restaurants over a defined period of time within
a defined  geographic  area.  The  specific  restaurant  locations  selected  by
franchisees are subsequently designated in separate franchise agreements.  Under
the standard area development  agreement,  a franchisee is generally required to
pay, at the time the agreement is signed, a non-refundable  fee of approximately
$5,000 per potential  restaurant in the defined  geographic  area. The number of
potential  restaurants is determined by negotiation  between the Company and the
franchisee.  The Company's standard area development agreement also provides for
a franchise fee of approximately $15,000 for each restaurant,  which is due when
the franchise  agreement with respect to a restaurant is executed.  The standard

                                       5
<PAGE>

franchise  agreement  is for a term of 15 years and  provides for payment to the
Company  of  royalties  equal  to  4%  of  gross  sales  and  minimum  marketing
expenditures of 4% of gross sales (1/2% of which is paid to the Rally's National
Advertising  Fund).  The Company  requires  each  franchisee to have an approved
full-time  Principal Operator who is responsible for the supervision and conduct
of the  franchise.  As of February  24,  1997,  the  Company had 41  franchisees
operating  230  restaurants   (exclusive  of  the   CKE-operated   restaurants),
representing approximately 49% of all systemwide restaurants. Approximately 5 of
these franchisees operate  approximately 25 restaurants in Western markets which
are in designated  market areas  ("DMA's")  where Carl's Jr. has  previously run
commercials  now being used by the Company.  These  Rally's  stores would not be
able to utilize the marketing material that the Company received from Carl's Jr.
as part of the marketing-sharing agreement. The Company has reached an agreement
in principle with these franchisee  groups which would provide these franchisees
additional  funding and  flexibility  to allow them to  continue to  effectively
compete without having access to the above referenced marketing materials.

Expansion Strategy

     The Company currently  intends to open  approximately 15 new restaurants in
existing  Company  markets in 1997.  These new  restaurants are expected to be a
mixture of  freestanding  locations and  conversions.  In addition,  the Company
plans to reopen 3 units previously closed.  Currently,  franchisees are expected
to open approximately 20 locations during 1997.

     There can be no assurance that the Company or its franchisees  will be able
to open planned new  restaurants or that, if opened,  these  restaurants  can be
operated  profitably.  The Company has pursued and intends to continue to pursue
an expansion strategy which depends upon a number of factors,  some of which are
beyond the control of the Company.  Such factors  include the  availability  and
cost of  suitable  locations,  the hiring,  training  and  retention  of skilled
management and other personnel,  the availability of adequate  financing and the
selection  of  viable   franchisees.   The  Company  may  also  make   selective
acquisitions,  depending on, among other factors,  the  availability of suitable
acquisition prospects and appropriate financing.  There can be no assurance that
the Company will be able to acquire additional restaurants or that, if acquired,
such  restaurants   will  be  profitably  added  to  the  Rally's  system.   See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."


     


                                       6
<PAGE>


Restaurant Locations

     The  following  table sets forth the number of  restaurants  in the Rally's
system at February 24, 1997 by designated market area ("DMA"):
<TABLE>
<CAPTION>
                                          Company-owned Restaurants (214)
<S>                                     <C>                                 <C>                                       
Alabama:                                Kentucky:                           Missouri:
Birmingham (14)                         Lexington (8)                       St. Louis (26)
Anniston (1)                            Louisville (22)                     Paducah-Cape Girardeau-Harrisburg-Mt.Vernon (1)
Florida:                                Louisiana:                          Ohio:
Jacksonville-Brunswick (11)             New Orleans (22)                    Cincinnati (12)
Tallahassee-Thomasville (6)             Michigan:                           Toledo (11)
Indiana                                 Detroit (35)                        Tennessee:
Indianapolis (22)                       Flint-Saginaw-Bay City (1)          Memphis (9)
                                                                            Virginia:
                                                                            Norfolk-Portsmouth-Newport News (13)

                                           Franchised Restaurants (257)

Arizona:                                Indiana:                              Ohio:
Phoenix (8)                             Indianapolis (2)                      Cleveland (29)
Arkansas:                               Evansville (7)                        Columbus (23)
Little Rock-PineBluff (10)              Ft. Wayne (4)                         Cincinnati (10)
Joplin-Pittsburgh (1)                   South Bend-Elkhart (3)                Dayton (19)
Ft. Smith (5)                           Terre Haute (4)                       Lima (2)
California:                             Kentucky:                             Toledo (2)
Bakersfield (4)                         Bowling Green (2)                     Youngstown (2)
Yuma-El Centro (4)                      Lexington (1)                         Zanesville (1)
Fresno-Visalia (2)                      Louisville (4)                        Pennsylvania:
Los Angeles (19)                        Louisiana:                            Pittsburgh (3)
Palm Springs (1)                        New Orleans (3)                       Tennessee:
San Diego (14)                          Michigan:                             Knoxville (1)
Florida:                                Flint-Saginaw-Bay City (8)            Memphis (3)
Jacksonville - Brunswick (2)            Detroit (6)                           Nashville (1)
Tallahassee-Thomasville  (2)            Lansing (4)                           Virginia:
W. Palm Beach-Ft. Pierce (1)            Mississippi:                          Norfolk-Portsmouth-Newport News (1)
Georgia:                                Jackson (4)                           Roanoke-Lynchburg (8)
Augusta (4)                             Missouri:                             West Virginia:
Illinois:                               Columbia-Jefferson City (1)           Charleston-Huntington (6)
Chicago (9)                             Springfield (5)                       Parkersburg (1)
Champaign-Springfield-Decatur (1)
</TABLE>


Site Selection and Construction

     The Company  believes  that the  location of a Rally's  restaurant  is very
important to its  success.  In  evaluating  particular  sites,  the Company uses
demographic data related to quick-service  restaurant sales.  Sites proposed for
both Company-owned  restaurants and franchised restaurants must be accepted by a
committee comprised of most members of the Company's senior management team. The
committee considers, among other factors, the accessibility,  visibility,  cost,
surrounding  traffic patterns and population  characteristics  of each potential
site.

     The Company has prototype plans and approved suppliers for the construction
of its  restaurants.  Since  1990,  the Company has  increasingly  used  modular
buildings. Prior to that time, "stick" (constructed on-site) buildings were used
almost exclusively.


                                        7
<PAGE>


Purchasing

     Franchisees are required to purchase their equipment,  food,  beverages and
supplies from Company-approved  suppliers. All products must meet specifications
set by the Company, and management continually monitors the quality of the food,
beverages  and  supplies  provided to the  restaurants.  The Company  negotiates
directly with wholesale  suppliers to ensure consistent quality and freshness of
products  throughout  the  Rally's  system  and  believes  that it has  obtained
competitive   pricing   from  its   suppliers.   The   Company   currently   has
approximately18  major food and paper suppliers and 29 distributors.  During the
year,  the Company  began  participating  with related  parties in attempting to
leverage  aggregate  purchase  volumes of common items to obtain more  favorable
pricing. The Company expects these efforts will continue in the future.

Restaurant Staffing and Training; Franchise Support

     A typical  Rally's  restaurant,  during peak hours, is staffed with 8 to 12
team  members,  with a manager  generally  on the  premises  at all  times.  The
function of assuring that each Company-owned  restaurant  consistently  delivers
high-quality  food and service is  performed  by Area  Managers.  Area  Managers
report to Regional Vice Presidents.  Regional Vice Presidents, Area Managers and
restaurant  management are compensated with a fixed salary plus a bonus based on
the  performance of the restaurants  under their  supervision.  On average,  the
Company has one Area Manager for every 5 to 10 Company  restaurants  and 8 to 11
Area Managers for each of the three Regional Vice Presidents.  The Regional Vice
Presidents report to the Senior Vice President of Operations.

     The  Company  believes  that  training is  important  to the success of its
restaurant  operations.  The Company's  training programs emphasize quality food
preparation, quick service, cleanliness of restaurants,  courteous employees and
consistency of execution.

     All General Managers of Company-owned  restaurants are required to complete
the  Company's  training  program,  which  generally  consists  of five weeks of
hands-on  training.  The  designated  operating  partner of each  franchisee  is
required  to receive  similar  training,  generally  12 weeks in  duration.  All
Company and  franchise  General  Managers must  generally  complete an intensive
six-day "Train the Trainer"  program before being certified to train  management
personnel  in  their  respective  markets.   The  certification   process  takes
approximately  30 days to complete.  In addition,  the Company  sends a training
team  consisting of both  management  and hourly  workers to a new  franchisee's
first  three  restaurant  openings  for a duration  of up to two weeks (one week
before and one week  after the  opening).  After a new  franchisee  opens  three
restaurants,  the Company provides this training team as it deems necessary,  or
upon the franchisee's request at the franchisee's expense.

     The Company has six  Franchise  Business  Managers,  each of whom acts as a
link between the Company and its franchisees.  The Franchise  Business  Managers
perform regularly scheduled restaurant operation evaluations to ensure that each
franchised restaurant consistently delivers high quality food and fast, friendly
service in a clean  environment.  They also  review the  financial  results  and
effectiveness of franchise  restaurant  management to identify possible areas of
improvement.  Franchise  Business  Managers  report to the Director of Franchise
Operations. Currently, each Franchise Business Manager supports an average of 40
franchised restaurants.

Competition

     The  quick-service  restaurant  industry is highly  competitive  and can be
significantly affected by many factors,  including changes in local, regional or
national  economic  conditions,  changes in consumer tastes,  traffic  patterns,
consumer  concerns  about the  nutritional  quality  of  quick-service  food and
increases in the number and  particular  locations  of  competing  quick-service
restaurants.  Factors such as  inflation,  increases in food,  labor  (including
health care costs) and energy costs and the  availability  of an adequate number
of hourly-paid  employees  also affect the  quick-service  restaurant  industry.
Major chains,  which have substantially  greater financial  resources and longer
operating  histories  than the Company,  dominate the  quick-service  restaurant
industry.  The Company  believes that its primary  competitors are five national
chains:  McDonald's,  Wendy's,  Hardee's,  Burger King and Taco Bell. In certain
markets,  the  Company  competes  with  other  quick-service  double  drive-thru
hamburger chains with operating concepts similar to the Company.  Certain of the
major  chains have  increasingly  offered  selected  food items and  combination
meals, including hamburgers, at discounted prices. The Company believes that the
pricing strategies of its competitors,  in general, had an adverse impact on the
Company's  systemwide sales in the last three 

                                       8
<PAGE>

fiscal years. The pricing or other marketing  strategies of one or more of these
competitors could have a continuing adverse impact on the Company's performance.

     With  respect to the sale of  franchises,  the Company  competes  with many
franchisors of restaurants,  including other double drive-thru franchisors,  and
franchisors of other business concepts.  The Company believes it has attracted a
number of franchisees with significant  experience in the restaurant industry as
a result of the strength of its concept and operating strategy and the favorable
potential return available from a relatively low capital investment.

     In general, there is active competition for management personnel,  capital
and attractive commercial real estate sites suitable for restaurants.

Employees

     As  of  February  24,  1997,  the  Company  employed   approximately  4,800
employees, including approximately 100 corporate personnel.

     Most  employees,  other than  restaurant  management and certain  corporate
personnel,  are paid on an hourly basis.  The Company  believes that it provides
working  conditions and wages that are comparable  with those of other companies
within the quick-service  restaurant  industry.  The Company's employees are not
covered by a collective bargaining agreement.

Trademarks and Service Marks

     The Company regards its trademarks and service marks as having  significant
value  and as  being  important  to  its  marketing  efforts.  The  Company  has
registered its principal logo Rally's Hamburgers(R) and its design with the U.S.
Patent and Trademark  Office (the "PTO") on the Principal  Register as a service
mark for its restaurant services.  The Company registered One of a Kind Fries(R)
with the PTO on the Principal  Register as a trademark for its french fries. The
Company also registered the  Rallyburger(R),  Rally-Q(R) and Smokin'  Sausage(R)
with the PTO as a trademark for these Company  sandwiches.  The Company has also
filed with the PTO several applications to register service marks and trademarks
used in connection with its  advertising of products and services  including the
Big Buford(TM)  sandwich.  The Company's policy is to pursue registration of its
marks whenever possible and to oppose strenuously any infringement of its marks.

     Government Regulation

     The Company is subject to Federal Trade Commission  ("FTC")  regulation and
state laws which regulate the offer and sale of franchises.  The Company is also
subject  to a number of state  laws which  regulate  substantive  aspects of the
franchisor-franchisee   relationship.   The  FTC's  Trade   Regulation  Rule  on
Franchising  (the "FTC Rule")  requires  the  Company to furnish to  prospective
franchisees a franchise offering circular containing  information  prescribed by
the FTC Rule. At least fifteen states  presently  regulate the offer and sale of
franchises  and,  in almost all cases,  require  registration  of the  franchise
offering with state authorities.

     State  laws  that  regulate  the offer and sale of  franchises  and/or  the
franchisor-franchisee  relationship  presently exist in a substantial  number of
states. Such laws generally require  registration of the franchise offering with
state  authorities  and/or regulate the franchise  relationship by, for example,
requiring the franchisor to deal with its franchisees in good faith, prohibiting
interference with the right of free association among franchisees,  limiting the
imposition  of  standards  of   performance   on  a  franchisee  and  regulating
discrimination among franchisees in charges,  royalties or fees. These laws have
not precluded the Company from seeking  franchisees in any given area.  Although
such laws may restrict a franchisor in the termination of a franchise  agreement
by, for example, requiring "good cause" to exist as a basis for the termination,
advance  notice to the franchisee of the  termination,  an opportunity to cure a
default and repurchase of inventory or other compensation, these provisions have
not had a significant effect on the Company's operations.

                                       9
<PAGE>

     The Company is not aware of any pending franchise legislation which, in its
view,  is likely to affect  significantly  the  operations  of the Company.  The
Company believes that its operations comply  substantially with the FTC Rule and
state franchise laws. Each Company-operated and franchised restaurant is subject
to regulation by federal  agencies and to licensing and  regulation by state and
local health,  sanitation,  safety, fire and other departments.  Difficulties or
failures in obtaining the required  licenses or approvals could delay or prevent
the opening of new restaurants.

     The  Company is subject to  federal  and state  environmental  regulations,
although  such  regulations  have not had a  material  effect  on the  Company's
operations.  More stringent and varied requirements of local governmental bodies
with  respect to  zoning,  land use and  environmental  factors  could  delay or
prevent development of new restaurants in particular  locations.  The Company is
also subject to the Fair Labor  Standards Act and various  state laws  governing
such matters as minimum wage requirements, overtime and other working conditions
and citizenship requirements. A significant number of the Company's food service
personnel are paid at rates related to the federal minimum wage and increases in
the minimum wage could increase the Company's labor costs.

     The restaurant  business is subject to extensive  federal,  state and local
regulations relating to the development and operation of restaurants,  including
regulations relating to building and zoning requirements, access to persons with
disabilities,  preparation  and sale of food and laws  governing  the  Company's
relationship with its employees,  including minimum wage requirements,  overtime
and working  conditions and citizenship  requirements.  The failure to obtain or
retain food licenses,  or a substantial increase in the minimum wage rate, could
adversely affect the operations of the Company's restaurants.

     The Company  believes that it is operating in substantial  compliance  with
applicable laws and regulations governing its operations.

Item 2.    Properties

     As of February 24, 1997,  the Company  owned or leased  parcels of land and
buildings for restaurants, either operating, under construction or held for sale
or  disposal  as  follows:  Company-owned  land (77) and  buildings  (254);  and
Company-leased  land (228) and  buildings  (60).  Land leased by the Company for
restaurants  is generally  under "triple net" leases that require the Company to
pay real estate taxes,  maintenance  and insurance  with respect to the premises
and, in some cases, pay contingent rentals based on sales in excess of specified
amounts.  Generally, the leases have initial terms of five to fifteen years with
options  to renew for  additional  periods  which can range  from five to twenty
years.  The Company  also leases its  corporate  headquarters  of  approximately
18,800 square feet. The Company also leases certain temporary storage facilities
for excess modular buildings and surplus equipment.

Item 3.  Legal Proceedings

     Jonathan Mittman, Steven Horowitz, Dina Horowitz and John Hannan v. Rally's
Hamburgers,  Inc., Burt Sugarman, GIANT GROUP, LTD., Wayne Albritton,  Donald C.
Moore, Edward C. Binzel, Gena L. Morris,  Patricia L. Glaser and Arthur Andersen
LLP (Case NO. C-94-0049-L-(CS).

     This putative class action  purportedly on behalf of the  stockholders'  of
Rally's,  alleging  certain  violations of the Securities  Exchange Act of 1934,
among other  claims,  with  respect to Rally's  common  stock,  was filed in the
United States District Court for the Western District of Kentucky on January 24,
1994 (Civ. No.  C94-0039-L(CS))  against GIANT Group, Ltd.  ("GIANT"),  Rally's,
certain  present and former  officers and  directors and Rally's  auditors.  The
complaint alleges defendants violated the Securities Exchange Act of 1934, among
other claims, by issuing inaccurate public statements about the Company in order
to  arbitrarily  inflate  the price of its common  stock.  The  plaintiffs  seek
unspecified  damages.  On February 14, 1994, a related  lawsuit was filed by two
other  stockholders  making the same allegations before the same court, known as
Edward L. Davidson and Rick Sweeney v. Rally's Hamburgers,  Inc., Burt Sugarman,
GIANT GROUP, LTD., Wayne M. Albritton,  Donald C. Moore,  Edward C. Binzel, Gena
L. Morris, Patricia L. Glaser and Arthur Andersen LLP, (Civ. No. C-94-0087-L-S).
On March 23, 1994, all plaintiffs filed a consolidated  lawsuit known as Mittman
et al. v. Rally's  Hamburgers,  Inc. et al.,  (Civ.  No.  C-94-0039-L(CS))  (the
"Mittman Actions").

                                       10
<PAGE>

     The Court denied  plaintiffs  motion for class  certification,  "until such
time as the issue of typicality of claims is further  developed and  clarified."
The  Court  granted  Mr.  Sugarman's  motion to strike  certain  scurrilous  and
irrelevant  allegations,  and directed  plaintiffs  to amend their  complaint to
conform to the Court's  order.  On April 15, 1994,  Ms. Glaser and GIANT filed a
motion to dismiss the  consolidated  lawsuit for lack of personal  jurisdiction.
The remaining  defendants  filed motions to dismiss for failure to state a claim
upon which  relief can be  granted.  On April 5, 1995,  the Court  denied  these
motions. (The Court struck plaintiffs' punitive damages allegations and required
plaintiffs  to amend  their  claims  under  Section 20 of the  Exchange  Act but
otherwise the Court let stand the most recent version of  plaintiffs'  complaint
at this juncture).

     Plaintiffs filed their second amended  complaint on June 29, 1995,  joining
additional plaintiffs pursuant to stipulation of the parties.

     Plaintiffs  renewed their motion for class  certification  on or about July
31, 1995.  Defendants filed in opposition in this motion on or about October 31,
1995. On April 16, 1996, the Court granted the motion and certified a class from
July 20, 1992 to September 29, 1993.

     On October 3, 1995,  plaintiffs  filed a motion to disqualify  Christensen,
Miller,  Fink, Jacobs,  Glaser, Weil & Shapiro,  LLP ("Christensen,  Miller") as
counsel  for  defendants  based on a purported  conflict  of interest  allegedly
arising from the  representation of multiple  defendants as well as Ms. Glaser's
position as both a director of Rally's and a partner in Christensen, Miller. The
Court  denied  the  motion  in the  fall  of  1996  and  refused  to  disqualify
Christensen, Miller.

     Fact  discovery  is set to  close  in April  1997.  No trial  date has been
scheduled yet.

     The Company denies all  wrongdoing and intends to vigorously  defend itself
in this action. Because these matters are in a preliminary stage, the Company is
unable to  determine  whether a  resolution  adverse to the Company  will have a
material   effect  on  its  results  of  operations   or  financial   condition.
Accordingly, no provisions for any liabilities that may result upon adjudication
have been made in the accompanying financial statements.  An estimate of defense
costs  reimbursable  under the Company's  directors' and officers'  insurance is
included  in  "Other  Assets"  in  the   accompanying   consolidated   financial
statements.

     Rally's Hamburgers, Inc. v. Red Line Burgers, Inc. (Case No. H-954115).

     In July 1994, the Company  entered into an agreement with Red Line Burgers,
Inc.  ("Red  Line")  whereby  Red Line leased from the Company all of its assets
being  operated as Rally's  restaurants  in Houston,  Texas.  Additionally,  the
agreement called for Red Line to convert Red Line's eight competing units in the
Houston  market to the  Rally's  brand.  Red Line failed to make  certain  lease
payments and on June 20, 1995,  the Company filed an action in the United States
District Court for the Southern District of Texas,  Galveston Division,  seeking
recovery  of damages  from Red Line for its  breach of the leases and  subleases
entered into with the Company.  The action  alleges that Red Line also committed
events of default  under the terms of all of its Franchise  Agreements  with the
Company.  As a result of such defaults,  the Company  terminated  such Franchise
Agreements,  and on August 3, 1995,  the Company filed suit in the United States
District Court, Western District of Kentucky, alleging breach of contract due to
Red Line's failure to pay royalties and other payments required by the Franchise
Agreements and its failure to pay  approximately  $400,000 plus interest owed on
certain  promissory  notes issued to the Company in lieu of such  payments.  The
Company also seeks accountability for approximately $660,000 in conversion costs
paid by the Company for conversion of Red Line's Houston restaurants. Subsequent
to the commencement of the foregoing actions,  Red Line filed for reorganization
under Chapter 11 of the United States  Bankruptcy  Code. In connection with such
proceedings,  the  Company's  actions  against  Red Line  have been  stayed.  In
November,  1996, Red Line filed a First Amended  Disclosure  Statement and First
Amended  Liquidating  Plan of  Reorganization  (the "Plan")  which  disputed Red
Line's  obligation to pay the Company any of the foregoing monies. By Bankruptcy
Court Order entered February 28, 1997 (the "Confirmation  Order"), the Company's
general  unsecured claims were allowed in the amount of  approximately  $615,000
[and the  general  unsecured  claim of  Rally's  National  Advertising  Fund was
allowed in the amount of approximately  $38,000].  The  Confirmation  Order also
approved the Plan.  The Plan provides for, among other things,  mutual  releases
among the Company and Red Line (such releases do not affect the allowed  general
unsecured  claim described  above) and the sale of Red Line's assets.  Cash from
those  sales  will  be  insufficient  to  pay  all  secured  claims,  taxes  and
administrative claims. Some of the 

                                       11
<PAGE>

Red Line assets are to be acquired by New Red Line,  Inc.,  an entity  involving
certain insiders and/or affiliates of Red Line.  Unsecured creditors of Red Line
(including the Company) will receive under the Plan a minority stock interest in
New Red Line,  Inc.  At this time,  the  likelihood  of  realizing  any value on
account of such minority stock interest is considered extremely speculative. The
receivable balances have been fully reserved.

     Harbor Finance  Partners v. GIANT GROUP,  LTD.,  Burt Sugarman,  Mary Hart,
Michael M. Fleishman,  David Gotterer,  Patricia L. Glaser,  Willie D. Davis and
John A. Roschman (Civ. Act. No. 14834).

     In February 1996, Harbor Finance Partners ("Harbor") commenced a derivative
action,  purportedly  on behalf of Rally's  against GIANT and certain of Rally's
officers and directors before the Delaware Chancery Court.  Harbor named Rally's
as a nominal  defendant.  Harbor  claims that the directors and officers of both
Rally's and GIANT,  along with GIANT,  breached  their  fiduciary  duties to the
public  shareholders  of  Rally's by causing  Rally's to  repurchase  from GIANT
certain  Rally's  97/8% Senior Notes due in the year 2000 at an inflated  price.
Harbor  seeks  "millions of dollars in damages,"  along with  rescission  of the
repurchase transaction. In the fall of 1996, all defendants moved to dismiss the
action. The Chancery Court conducted a hearing on November 26, 1996, but has not
yet ruled on the pending motions.  The Company denies all wrongdoing and intends
to  vigorously  defend the action.  It is not possible to predict the outcome of
this action at this time.

     Rally's Hamburgers, Inc., v. Arkansas Investment Group, Inc., U.S. District
Court for the Western District of Kentucky, Case No. 3:96CV-603-S

     Rally's  filed a lawsuit on August 12,  1996  against  Arkansas  Investment
Group,  Inc.  ("AIGI"),   a  franchisee  that  currently  operates  ten  Rally's
restaurants  located in Arkansas.  The lawsuit  seeks to recover  royalties  and
contributions to the Rally's National  Advertising Fund owed by AIGI pursuant to
the applicable  franchise  agreements,  which total approximately  $500,000 with
accrued  interest  as of  February  28,  1997.  After  falling in arrears on its
royalties and  advertising  fund  contributions,  Rally's and AIGI  negotiated a
written  agreement  to  allow  AIGI to make  payments  under a  revised  payment
schedule.  AIGI also  defaulted  on that written  obligation.  AIGI has filed an
Answer and  Counterclaim  in which it alleges it does not owe the  royalties and
advertising  contributions due to its alleged  disagreement with operational and
marketing  decisions  of Rally's  and  Rally's  alleged  failure to rebate  sums
obtained  from  suppliers.  AIGI has  asserted  causes of action  for  breach of
contract,  violation of the Arkansas Franchise  Practices Act, unjust enrichment
and fraud.  The  Counterclaim  alleges  that AIGI has been  damaged in excess of
approximately $75,000 (the minimum jurisdictional amount for federal court), but
no specific amount of damages is identified in the Counterclaim.  Rally's denies
AIGI's  allegations and intends to vigorously defend the  Counterclaim.  Because
the  litigation  is in a preliminary  stage,  the Company is unable to determine
whether a resolution  adverse to the Company will have a material  effect on its
results of operations or financial condition. Accordingly, no provisions for any
liabilities that may result upon adjudication have been made in the accompanying
financial statements.

     Kader Investments, Inc. v. Rally's Hamburgers, Inc., CAL.SUPER.CT., 
Orange County (Case No. 772257)

     In December 1994, Rally's entered into two franchise  agreements with Kader
Investments,  Inc.  ("Kader")  for the  development  and  operation  of  Rally's
Hamburgers restaurants in Anaheim,  California and Tustin,  California.  Rally's
assisted the franchisee in developing and opening the  restaurants.  On November
27, 1996,  Kader filed a six-count  Complaint  against Rally's in the California
Superior   Court  for  Orange  County  (Case  No.  772257)   alleging   material
misrepresentation,  respondent  superior,  breach  of  contract,  breach  of the
implied covenant of good faith and fair dealing,  fraud and unfair  competition.
These claims arise out of allegations  concerning  Rally's offer and sale of two
franchises (under a two-store development agreement), and Rally's actions during
the term of the  agreements.  The  Complaint  seeks as relief  rescission of the
parties'  franchise  and  development  agreements;  general  damages of at least
$1,494,277 and $1,400,000 for the material  misrepresentation  and fraud counts,
respectively;  general  damages in  unspecified  amounts as to the other counts;
punitive damages in unspecified  amounts;  and attorneys' fees. Rally's filed an
Answer, and intends to file a Cross-Complaint  alleging breach of contract.  The
court has permitted the parties to hold discovery in abeyance for a short period
pending settlement  discussions.  The Company is currently  attempting to settle
the claim.  However,  the outcome of such settlement  discussion is uncertain at
this time.  Should  discussions  not result in a settlement,  Rally's intends to
vigorously defend against the claims. Because the litigation is in a preliminary
stage,  the Company is unable to determine  whether a resolution  adverse to the
Company will have a material  effect on its results of  operations  or financial

                                       12
<PAGE>
condition.  Accordingly,  no provisions for any liabilities that may result upon
adjudication have been made in the accompanying financial statements.

     The Company is  involved  in other  litigation  matters  incidental  to its
business.  With  respect to such other  suits,  management  does not believe the
litigation in which it is involved will have a material  effect upon its results
of operation or financial condition.

Item 4.    Submission of Matters to a Vote of Security Holders

     Not applicable.


                                     PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters

     The Company's  Common Stock is quoted on the National  Market System of the
NASDAQ Stock Market under the symbol "RLLY". As of February 24, 1997, there were
approximately  1,552 record  holders of the Company's  Common  Stock.  The table
below sets forth the high and low sales prices of the Company's Common Stock, as
reported on the NASDAQ  National  Market  System,  for each  quarter  during the
Company's last two years.

 1996          
 Quarter ended      March 31        June 30       September 29      December 29
 High            $   2 1/4       $   4 5/16     $     3 9/16      $    4 7/8
 Low                 1 1/32          11/2            2 1/8            3

 1995
 Quarter ended      April 2          July 2        October 1        December 31
 High            $   4           $   4          $     3 5/8       $    2 11/16
 Low                 2 1/2           2 1/4            2 1/4            1 5/16

         On December 20, 1996, the Company issued  warrants (the  "Warrants") to
purchase an aggregate of 1,500,000  restricted shares of its Common Stock to CKE
and Fidelity  National  Financial,  Inc. The Warrants have a three-year term and
are not  exercisable  until  December 20, 1997. The exercise price is $4.375 per
share,  the  closing  price  of the  Common  Stock on  December  20,  1996.  The
underlying  shares of Common Stock have not been  registered with the Securities
and Exchange Commission and, therefore,  are not freely tradable. Upon exercise,
the Warrants will provide  approximately  $6.6 million in additional  capital to
the Company.  See Note 4 to the accompanying  consolidated  financial statements
for further discussion.

                                       13
<PAGE>


Item 6.    Selected Consolidated Financial Data

     The consolidated financial data was derived from the consolidated financial
statements  and  includes   Rally's   Hamburgers,   Inc.  and  its  wholly-owned
subsidiaries.  This  selected  data  should  be read  in  conjunction  with  the
consolidated  financial statements of the Company and the notes thereto, and the
information  contained  in  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
 (In thousands, except per share amounts and statistical data)
<S>                                       <C>           <C>           <C>           <C>            <C>                            
                                          January 3,    January 2,    January 1,    December 31,   December 29,
                                             1993          1994          1995           1995           1996
                                         ------------- -------------  ------------  -------------- -------------

Systemwide sales                         $    296,543  $    354,666   $   370,087   $   355,719    $    316,670
                                         ============= =============  ============  ============== =============

Company restaurant sales                 $    112,894  $    165,829   $   178,476   $   181,778    $    156,445
Other revenues                                  7,754         8,517         7,842         7,081           6,307
                                         -----------   -------------  ------------  -------------- -------------
Total revenues                                120,648       174,346       186,318       188,859         162,752
                                         ------------- -------------  ------------  -------------- -------------
Income (loss) from operations                  15,057        (7,050)      (14,636)      (36,470)          4,090
   (1)(2)(3)
Other (expense)                                  (797)       (4,433)       (9,619)       (9,910)         (8,057)
Litigation settlement                               -        (2,000)            -             -               -
                                         ------------- -------------  ------------  -------------- -------------
Income (loss) before taxes                     14,260       (13,483)      (24,255)      (46,380)         (3,967)
Tax provision (benefit)                         4,981        (4,576)       (4,982)          539            (675)
                                         ------------- -------------  ------------  -------------- -------------
Net income (loss) before                        9,279        (8,907)      (19,273)      (46,919)         (3,292)
   extraordinary items
Extraordinary items (4)                             -             -             -             -           5,280
                                         ============= =============  ============  ============== =============
Net income/loss                                 9,279        (8,907)      (19,273)      (46,919)          1,988
                                         ============= =============  ============  ============== =============

Income (loss) per common share:
   Income (loss) before extraordinary    $        .76  $       (.67)  $     (1.42)  $     (3.00)   $       (.19)
   item
   Extraordinary item                               -             -             -             -             .31
                                         ------------- -------------  ------------  -------------- -------------

Net income (loss)                        $        .76  $       (.67)  $     (1.42)  $     (3.00)   $        .12
                                         ============= =============  ============  ============== =============

Weighted average shares outstanding            12,264        13,207        13,564        15,620          17,007

Total assets                             $    107,001  $    185,397   $   169,416   $   137,392    $    112,258
Long-term debt and obligations under
   capital leases                              24,045        97,784        94,141        97,958          69,564
Shareholders' equity                           61,283        62,527        53,487         6,672          19,365

Restaurants open at end of period
Company                                           197           252           250           239             209
Franchised                                        253           268           292           242             258
                                         ============= =============  ============  ============== =============
Total                                             450           520           542           481             467
                                         ============= =============  ============  ============== =============
</TABLE>

(1)  The fiscal year ended January 2, 1994 includes  approximately $12.6 million
     charged against operations for a major business  restructuring  program and
     other restaurant closings.

(2)  The fiscal year ended January 1, 1995 includes approximately $17.3 million 
     charged against operations for changes in business strategies.

(3)  The fiscal  year ended  December  31,  1995  includes  approximately  $17.3
     million charged against  operations for changes in business  strategies and
     restaurant  closings.  The year also includes  approximately  $13.7 million
     related  to  the  Company's   implementation   of  Statement  of  Financial
     Accounting Standards No. 121. See Note 16 to the accompanying  consolidated
     financial statements.

(4)  The  extraordinary  items for the  fiscal  year  ended  December  29,  1996
     represents a gain on the early  retirement  of debt,  net of tax expense of
     $1,350,000.   See  Note  10  to  the  accompanying  consolidated  financial
     statements.

                                       14
<PAGE>


Item 7. Management's Discussion and Analysis of Financial Condition and Results 
        of Operations

     This has been a significant  year for the Company on many fronts.  In order
to more readily  understand the Company's  improved  performance,  the following
table provides a comparative view of the Company's underlying operations.
<TABLE>
<CAPTION>
                                                                        (In thousands)
                                                                      Fiscal Years Ended
                                                  -----------------------------------------------------------
<S>                                               <C>                     <C>                 <C>
                                                     January 1,            December 31,        December 29,
                                                       1995                    1995                1996
                                                  ----------------      -----------------    ---------------

Income (loss) from operations before restaurant
   closures and other                             $      2,623          $      (5,425)       $      4,110
Provision for restaurant closures and other            (17,259)               (31,045)                (20)
                                                  ---------------      ----------------      --------------
Income (loss) from operations                          (14,636)               (36,470)              4,090

Total other expense                                     (9,619)                (9,910)             (8,057)
                                                  ---------------      ----------------     ---------------

Loss before income taxes and extraordinary items
                                                       (24,255)               (46,380)             (3,967)
(Provision) benefit for income taxes                     4,982                   (539)                675
Extraordinary items, net of tax                              -                      -               5,280
                                                  ---------------      ----------------      --------------

Net income (loss)                                 $    (19,273)         $     (46,919)       $      1,988
                                                  ===============      ================      ==============
</TABLE>

     The extraordinary  gain, net of tax, of approximately  $5.3 million or $.31
per share from the  Company's  early  retirement  of certain of its  outstanding
Senior Notes, at amounts below carrying value, resulted in the Company reporting
net income for fiscal 1996.  The  transactions  involving  the Senior Notes were
opportunities  created by the Company's  conservation  of cash during the second
half of 1995 and the depressed market price of the Senior Notes during the year.
In addition, the transactions resulted in a reduction of net interest expense in
1996 of  approximately  $1.3  million  and $2.1  million as compared to 1994 and
1995,  respectively.  These  transactions are more fully described in Note 10 to
the accompanying consolidated financial statements.

         As  more  fully  discussed  in Note  13 to the  accompanying  financial
statements,  the  Company's  effective  tax rate  applied to its book  operating
losses is  significantly  below statutory rates, due primarily to concerns as to
the  ultimate   realizability  of  net  operating  loss   carryforwards.   Until
circumstances  otherwise indicate that realization becomes more likely than not,
no additional benefit will be recognized.

         As evidenced in the table above, the provision for restaurant  closures
and other was  significantly  reduced in 1996 from the prior year  levels.  This
reduction is primarily  attributable  to the current year  strengthening  of the
store level economics which have improved the Company's ability to recover, at a
minimum,  its store level investment and to prior writedowns of  underperforming
assets,  thereby  reducing the need at this time for  additional  writedowns  or
disposals of Company assets. See the section below entitled "Restaurant Closures
and Other" for a more detailed discussion.

         The Company's  income from operations  before  restaurant  closures and
other in fiscal 1996 represented a substantial improvement of approximately $9.5
million  over the  prior  year.  This  improvement  in the  Company's  financial
performance  is  primarily  attributable  to a  turnaround  plan,  predominately
formulated  in the first half of 1996,  which the Company has been  implementing
over the balance of the year.  The plan focuses on four key  strategies  to stem
the prior negative  operational  performance  trend:  (i) strengthen the balance
sheet and reduce fixed  costs,  (ii) improve  store level  profitability,  (iii)
establish an effective  brand  positioning,  and (iv) pursue  opportunistic  new
store  development.  The  results  of each  strategy  of the plan are more fully
discussed below.

                                       15
<PAGE>

         Although the Company's  debt level is still high,  the Company has made
substantial  progress in improving its balance  sheet and reducing  fixed costs.
The debt load was significantly  reduced through the retirement of approximately
$22 million  face value of the  Company's  Senior  Notes in January  1996 and an
additional  $4.7 million during the fourth quarter.  As a result,  the Company's
annual  interest  expense  related  to the  Senior  Notes  has been  reduced  by
approximately  $2.6 million.  In addition,  $10.8 million in gross proceeds were
generated through the Company's Rights Offering completed in September 1996. The
proceeds  from the  Offering  have  been  used to pay off  debt of $4.5  million
approximately  and  the  remainder  will be used  for  new  store  construction,
refurbishment  of some  existing  restaurants  and for other  general  corporate
purposes,  including possible further debt reduction.  Outstanding warrants from
the  Rights  Offering  and from a  separate  issuance  of  1,500,000  additional
warrants in December 1996, if exercised, could raise an additional $17.4 million
in cash proceeds. The Company also made progress in disposing of surplus assets,
as  assets  held  for sale  declined  by over $4  million  from the end of 1995.
Lastly,  the Company reduced its general and  administrative  costs by over $3.5
million during the year.

         The  Company has also made  progress in the second key  strategy of its
turnaround  plan,  as  store-level  profitability  has  improved.  Much  of this
improvement  resulted from the Company's cost reduction actions related to food,
paper and labor which were implemented in the beginning of the second quarter of
1996 and are further discussed in "Results of Operations." The primary impact of
these  changes  was  realized  during  the third  and  fourth  quarters  and was
reflected in the  Company's  store profit  margins.  Improvement  in store level
profitability  also resulted from  improvements in the Company's cost structure,
reflecting the elimination of heavy discounting that drove traffic increases but
did not materially improve the Company's profitability.

         The  Company's  third key strategy in its  turnaround  plan will be the
primary  focus going into 1997.  Although the Company  generated net income from
operations,  same store sales  continued to decline  since 1995.  To combat this
negative trend in sales, management believes an effective brand positioning must
be  established  in order to grow same store sales.  The new brand  positioning,
referred to as "Bigger, Better Burgers," was developed during the fourth quarter
of  1996  with  the  assistance  of  the  Company's  new   advertising   agency,
Mendelsohn/Zien. The new positioning is based on an improved burger product line
including two new premium  burgers;  new, more  impactful  menu boards;  and new
advertising.  The new  advertising  mirrors the successful  campaign  created by
Mendelsohn/Zien  for the Carl's Jr. chain. The new positioning was rolled out to
three of the Company's  markets in December  1996 and to the  remaining  Company
markets  by late  February  1997.  The  Company's  franchisees  have also  begun
conversion to the new brand  positioning  and, in general,  are very supportive.
Although  preliminary sales results have been  encouraging,  management does not
expect to see the full impact of this new strategy  prior to the second  quarter
of 1997. Management believes that new brand positioning will result in a gradual
increase in sales over time.

     The final strategy in the Company's turnaround plan is to increase focus on
new store  development.  Faced with declining same store sales and profitability
over the three years prior to 1996,  the Company had  concluded at various times
that a constriction  of operations  through store closures was necessary.  Given
the progress  against its plan,  management  believes  that the Company can once
again start  focusing on growing sales through new store  development.  In 1996,
the Company opened 6 stores and franchisees  opened 15 stores, for a total of 21
new  stores.  For 1997,  management  expects  to open 15  Company  stores and 20
franchised  stores.  In addition,  as a result of improved store level economics
and in an effort to improve future cash flows,  management has decided to reopen
three  stores  previously  closed and to  continue to operate one store that had
been  designated  for  closure.  These  decisions  were  made  possible  by  the
improvements in controllable cost performance in the second half of the year.

     Further  discussion  of the  factors  affecting  results of  operations  is
included below.

Proposed Trasaction

     On March 25, 1997, the Company agreed in principle to a merger  transaction
pursuant to which the COmpany would become a wholly-owned subsidiary of Checkers
Drive-In  Restaurants,  Inc.,  a Delaware  corporation  ("Checkers").  Checkers,
together with its  franchisees,  operates  approximately  478 double  drive-thru
hamburger restaurants primarily located in the Southeastern United States. Under
the terms of the letter of intent  executed by the Company  and  Checkers,  each
share of the  Company's  Common  Stock will be  converted  into three  shares of
Checker's  common stock upon  consummation  of the merger.  The  transaction  is
subject to negotiation of definitive agreements,  recipt of fairness opinions by
each  party,  receipt of  stockholder  and other  required  approvals  and other
customary conditions. 

                                       16
<PAGE>
Restaurant Closures And Other

     Certain  charges in fiscals 1994,  1995 and 1996 have been  aggregated  and
segregated into the caption "Provision for Restaurant Closures and Other" in the
accompanying  Statements of Operations.  These items represent  estimates of the
impact of management decisions which have been made at various points in time in
response to the  Company's  sales and profit  performance  and the  then-current
revenue  building and profit  enhancing  strategies and are discussed in further
detail below.

     The Company  entered  1993 with plans to rapidly  develop and open over 100
new  Company  restaurants.  Many  of  these  units  were  targeted  for  new  or
underdeveloped markets. Under the Company's 1993 expansion strategy, the Company
believed that rapid penetration of new or underdeveloped markets would result in
the same favorable  operating  leverage and marketing  efficiencies  that it had
experienced in its more developed markets.

     In late  1993,  the  Company  decided  to  reassess  the pace of its growth
strategy,  as it became  apparent  that many of its new  restaurants,  primarily
those in certain of the new markets,  were not  performing  at expected  levels,
despite  allocation of incremental  advertising  funds into those markets.  This
allocation of advertising  funds, the Company now believes,  was unsuccessful in
driving  incremental sales in those certain markets and,  moreover,  reduced the
Company's  ability to maintain  overall share of voice in its existing  markets.
The  impact  of the  poor  performance  of  those  certain  markets,  therefore,
decreased overall store level profitability while unfavorably  impacting general
and administrative cost ratios.

     As a result of these, and other factors,  the Company decided in late 1993,
to (i) significantly slow down its development of new restaurants and ultimately
to close certain  restaurants,  (ii) exit certain markets and (iii) not to enter
other  markets.  The Company also began  developing  plans to reduce  restaurant
operating expenses,  general and administrative  costs and costs associated with
the development of new restaurants.  The Company believed these strategies would
help it maintain its everyday low price  strategy for its products in the future
and provide the best opportunity for improved profitability.

     During 1994, the Company implemented  strategies designed to increase sales
and profits at  restaurant  level.  These  strategies  included,  among  others,
discounting  its  products  for  certain  periods of time in certain  markets to
respond to increased  competition  and the  introduction of certain limited time
only products and premium quality  sandwiches  which the Company  believed would
increase guest frequency and ticket averages. The Company's advertising campaign
was also reviewed  during 1994 resulting in the  replacement in late 1994 of the
Company's  advertising agency. In July 1994, the Board of Directors reinstated a
senior management team led by longtime Company restaurant  operators to increase
focus on improved  operations.  Despite these  strategies,  sales and profits of
Company-owned restaurants, as a whole, did not adequately respond.

     Additionally,  throughout 1994, the Company continued to monitor its growth
strategy  in relation to  operating  performance  and  available  financial  and
management  resources,  and  periodically  made  decisions to further reduce its
planned new restaurant openings. Due to the individual decisions made at various
times during the year,  provisions of $9.3 million were made in the accompanying
financial  statements  for the  write-off  of assets  related to the  previously
incurred  costs on  construction  projects  to be  abandoned,  for the  expected
occupancy-related costs until disposal of sites which will not be developed, and
for  reduction to net  realizable  values of assets  which,  as a result of such
decisions,  were then  considered  to be surplus or impaired.  These charges are
discussed in more detail below.

     In November  1994,  the Board of Directors  retained  outside  professional
consultants to assist the Board and  management in a critical  evaluation of the
Company's  business.  The culmination of this work was a plan, which was adopted
by  management,  designed to improve  earnings  and cash flow . Part of the plan
called for significant  curtailment of new Company-owned  restaurant development
in 1995 and  concentration of the Company's  management and resources in certain
of its existing Company  markets.  The plan also called for improving cash flows
through (i) building  revenues  through premium  sandwich  offerings and limited
time  offers  and  (ii)  selling  all   non-productive   assets.  The  Company's
management,  therefore,  began  efforts to  franchise or  selectively  otherwise

                                       17
<PAGE>

divest of approximately 60 Company-owned  stores.  This strategy was expected to
allow the  Company  to  concentrate  on  regaining  sales,  profit and cash flow
momentum in its other markets through  stronger focus on a smaller number of its
most profitable  markets.  The Company believed that franchisees would be better
able to  concentrate  on the units that had not been top  performers and achieve
near term improvement in the performance of those units. Efforts to franchise or
divest of these stores were  expected to encompass a  combination  of strategies
such as sale,  joint  venture,  leasing  arrangements  and  external  management
contracts.  As a result of this  plan,  the  Company  recorded  a charge of $8.0
million  in  1994,  representing  an  estimate  of the  difference  between  the
estimated net realizable value, given the then most likely  divestiture/disposal
plan,  and the net book  value of these  restaurants  and  markets.  The  charge
included  approximately $3.2 million as a reserve against identifiable goodwill,
territory  rights and other  intangible  assets.  The remaining $4.8 million was
recorded as a reserve against property and equipment.

     Early in 1995, six of the 60 units, five of which were in one market,  were
closed and sublet. During the third quarter,  1995, management concluded that it
was  unlikely  that much of the 1994 plan of disposal  described  above would be
executable.  For  this  reason,  the  Company  decided  to close up to 16 of the
remaining  restaurants,  resulting in an additional charge in the third quarter,
1995 of approximately  $400,000 to reflect additional  writedown of the property
and equipment to currently  estimated net realizable  values and $2.3 million to
record  reserves for expected  future  occupancy  related costs.  Eight of these
restaurants were closed as of December 31, 1995. Six additional restaurants were
closed in 1996. The Company decided in 1996 to continue to operate 2 of these 16
restaurants  until such time that the leases have expired or the properties have
been sublet.  The Company decided to continue to operate the remaining 38 stores
previously included in the original 60 restaurants. With the restaurant closures
discussed above and without the burden of impending closure  associated with the
prior  plan  regarding  these  markets,  management  believes  that the  markets
represent acceptable growth opportunities for future development.

     Management also decided to close nine non-profitable restaurants in certain
of  its  core  markets  resulting  in  charges  in the  third  quarter  1995  of
approximately  $1.9  million  related  to the  writedown  of assets to their net
realizable  values and $1.9 million to record expected future occupancy  related
costs.  Seven of these  restaurants  were closed as of December  31,  1995.  The
Company decided in 1996 to continue to operate two of these restaurants,  one of
which is being  operated  by CKE,  as part of a  management  agreement  with the
Company.

     During the third quarter 1995,  charges were recorded of approximately $3.3
million to dispose of the assets  located on eight sites which had been operated
as Company units and then leased to a former franchisee. The Company decided not
to  refranchise  these  units due to  failure to  identify a suitable  franchise
candidate which management believed had adequate and evident financial resources
to successfully open the Houston market. This charge consisted of a writedown of
approximately  $2.7  million of the  assets to their  estimated  net  realizable
values and reserves of  approximately  $600,000 for  expected  future  occupancy
related costs.

     In 1995, 18 additional modular buildings became excess, as expected Company
development  continued to be reduced and  decisions  were made  regarding  other
restaurant  closures.  At  December  31,  1995,  the Company  had  available  54
substantially completed modular restaurant buildings, which were not expected to
be assigned to future Company  development.  In order to recognize the impact of
the  additional  excess  buildings  and to more  competitively  price all of the
modular buildings, the Company recorded charges of approximately $1.6 million in
the third quarter, 1995 and $458,000 in the fourth quarter, 1995. The charges of
$2.3 million related to third quarter 1995 closure  decisions,  described above,
also included  approximately $1.5 million related to an additional  writedown on
modular  buildings which were  previously  utilized at those  locations.  During
1996,  the Company sold 20  buildings,  resulting in 34 buildings  available for
sale at December 29, 1996 which are being  marketed to  franchisees  and others.
Current  expectations  of net  realizable  value  are  based  on  the  Company's
experience related to marketing the buildings.

     The Company  recorded  approximately  $1.5  million in charges in the third
quarter, 1995 related to further writedowns on excess land idled by slowdowns in
the  Company's  expansion  plans.  Such land had been  scheduled to be auctioned
during the fourth quarter,  1995. These auctions  occurred in the fourth quarter
and closed in the first quarter,  1996. The absolute  auctions  generated  lower
than  anticipated  sales  prices,  and  additional  losses of 

                                       18
<PAGE>

$1.1 million were recorded in the fourth quarter,  1995. As further discussed in
"Liquidity   and  Capital   Resources,"   these  sales  provided  cash  flow  of
approximately $2.4 million, primarily in the first quarter, 1996.

     During  the fourth  quarter,  1995 the  sublessee  of five of the six sites
closed  under the  November  1994 plan,  defaulted  on the terms of the sublease
agreements,  resulting in charges of $483,000  related to occupancy and $430,000
to reduce the carrying value of the tangible assets to management's  estimate of
fair value less cost to sell.

     Due to concerns for obsolescence and abnormal wear and tear associated with
transport  and  storage of surplus  equipment,  management  recorded an $820,000
writedown in December,  1995 of the equipment's  carrying  value.  Additionally,
fourth quarter,  1995 charges totaling  approximately $1.1 million were recorded
to reflect  changes in the  estimated  net  realizable  values of the  Company's
remaining surplus assets and properties.

     The $9.3 million of charges recorded in 1994, discussed above, included the
following.

     The Company recorded charges of $2.6 million related to abandoned projects,
$300,000 related to the write-off of certain identifiable intangibles which were
not  expected to be  recoverable  and $450,000 to increase  reserves  previously
provided on surplus assets due to the continued  slowdown in the  development of
new restaurants.  The costs related to abandoned projects represent writeoffs of
recorded  amounts not expected to be  recovered  ($1.6  million)  and  estimated
occupancy costs until disposal ($1.0 million).

     Management  decided to exit one of its  non-core,  underperforming  markets
and, at that time,  recorded a charge of approximately $1.1 million primarily to
cover writedown of assets ($800,000) and occupancy exposure ($300,000).

     Additionally,  the Company wrote off intangible  assets  associated with an
abandoned project site ($131,000), provided for the estimated occupancy exposure
on abandoned  project  sites  ($430,000)  and provided for asset  write-offs  on
projects to be abandoned ($443,000).

     Based  upon  the  Company's  estimates  of the  number  of  excess  modular
buildings  and the then  current  estimate  as to  recoverability,  the  Company
recorded  a charge of $1.2  million  in 1994.  Included  in the $2.6  million of
charges noted above is $300,000  related to an  additional  writedown on modular
buildings which had been assigned to projects  subsequently  abandoned after the
end of the third quarter.

     During  1994,   management  determined  that  portions  of  the  equipment,
training,  and installation  expenditures  related to its point of sale and back
office  restaurant  systems'  rapid  installation  resulted  in higher  costs or
overbillings  and did not ultimately add to the value of the Company's  systems.
Approximately $1.3 million of these costs were deemed to have no probable future
economic  benefit  and  were  written  off.  In  addition,  due to  the  further
curtailment of new store  development,  the writedown of the Company's  point of
sale and back  office  software  recorded in 1993 was  increased  (approximately
$300,000).  Further,  management  also decided to remove from  operation and not
pursue  further  deployment  of its high tech  video  ordering  technology  and,
therefore,  recorded a charge of $600,000  related to the  hardware and software
costs of this endeavor.

     The Company also recorded charges in 1994 of approximately $400,000 related
to the recorded values of projects abandoned in 1994.

     The $12.6 million of charges recorded in 1993 included the following.

     The Company  recorded  charges of $11.9 million related to a major business
restructuring  program  and other  restaurant  closings  designed to improve the
Company's  profitability.  As a result of these  actions,  the Company closed 20
restaurants in 8 markets (including certain markets which the Company has exited
entirely),  and abandoned its plans to build an additional 46  restaurants  then
under development.

     The  restructuring  program  resulted  in a charge  against  operations  of
approximately  $9.6 million.  Approximately  $8 million of the charge related to
asset writedowns,  including  writedowns to recoverable amounts 

                                       19
<PAGE>

of certain  other assets whose  recovery was  dependent on previous  development
plans  and  the  balance  represented  future  occupancy-related  expenses.  The
decision to close other  restaurants  resulted in an additional  charge  against
operations  during 1993 of approximately  $2.3 million,  of which  approximately
$1.8 million related to writedowns of assets, and the balance represented future
occupancy-related expenses.

     In addition to the charges  discussed above, the Company reached  decisions
during 1993 to reduce the carrying  value of certain  underperforming  assets in
non-core markets by approximately $700,000.

     As described  above, a substantial  portion of the charges in fiscals 1993,
1994 and 1995 related to asset writedowns.  The remainder of the charges related
substantially   to  the   establishment   of  reserves   for   expected   future
occupancy-related  costs.  During 1996, the Company  revised its estimate of net
realizable  value for five of its poor  performing  restaurants  in  Montgomery,
Alabama  based  upon  an  existing  agreement  to  sell  the  restaurants  to  a
non-affiliated  restaurant  operator.  Such  change in  estimate  resulted  in a
reduction of approximately $232,000 in related reserves. In addition, during the
fourth  quarter of 1996,  management  decided to reopen  three units  previously
closed and to  continue to operate a fourth  unit that had been  designated  for
closure,  resulting in a reduction in the reserves for future  occupancy-related
costs of approximately  $659,000.  In addition,  approximately  $87,000 in other
charges for net changes in estimated  asset recovery were recorded  during 1996.
Such  adjustments  to the reserves are  included in the caption  "Provision  for
restaurant  closures and other" on the  accompanying  Statement  of  Operations.
Total  Minimum lease  commitments  associated  with surplus  properties is $11.2
million.  As of December 29, 1996,  approximately  $5.8 million  remained in the
reserve for expected  future  occupancy-related  costs,  which is net of amounts
representing  interest,  discounted at 12%, as well as estimated future sublease
recoveries.  Assets held for sale of $2.0 million at December 29, 1996 resulting
from the actions  noted above  consist  mainly of surplus  land,  buildings  and
equipment.  The expected  disposal dates for these assets are over the next 3 to
24 months.  The  carrying  amounts of such  assets to be  disposed  of are shown
separately on the accompanying consolidated balance sheets.

     In  addition  to  the  charges   described  above,   1995  results  include
approximately  $13.7 million of certain  charges  recorded in the fourth quarter
related to the adoption of Statement of Financial  Accounting  Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121).  This charge  represents  impairment of the carrying
value  of the  assets  of 37  stores  based on  management's  future  cash  flow
estimates  given then  current  base  lines and  reasonable  trend  assumptions.
Additional  impairment  reserves of approximately  $824,000 were recorded during
1996,  primarily  related  to  three  additional  restaurants  determined  to be
impaired. See Note16 to the accompanying consolidated financial statements.

General

     Rally's revenues are derived primarily from Company-owned  restaurant sales
and royalty fees from  franchisees.  The Company also receives revenues from the
award of exclusive rights to develop Rally's  restaurants in certain  geographic
areas (area development fees) and the award of licenses to use the Rally's brand
and confidential operating system (franchise fees).  Systemwide sales consist of
aggregate  revenues  of  Company-owned  and  franchised  restaurants  (including
CKE-operated).   Company  revenue  also  includes  payments  resulting  from  an
operating   agreement  with  CKE,  referred  to  as  Owner  fee  income  in  the
accompanying  consolidated  financial  statements.  Restaurant  cost  of  sales,
restaurant  operating expenses,  depreciation and amortization,  and advertising
and promotion expenses relate directly to Company-owned restaurants. General and
administrative  expenses relate to both Company-owned  restaurants and franchise
operations.  Owner  expenses  relate to  CKE-operated  restaurants  and  consist
primarily of depreciation and amortization.


                                       20
<PAGE>


     The table below sets forth the percentage  relationship  to total revenues,
unless  otherwise  indicated,   of  certain  items  included  in  the  Company's
consolidated statements of income and operating data for the periods indicated:
<TABLE>
<CAPTION>
                                                                    Fiscal Years Ended
                                           ---------------------------------------------------------------------
<S>                                         <C>           <C>          <C>            <C>          <C>
                                            January 3,    January 2,   January 1,     December     December 29,
                                                                                         31,
                                               1993          1994         1995          1995           1996
                                           ------------- ------------- ------------  ------------  -------------

Revenues:
Restaurant sales                                 93.6%         95.1%         95.8%         96.2%         96.1%
Franchise revenues and fees                       6.4           4.9           4.2           3.8           3.6
Owner fee income                                  -             -             -             -              .3
                                           ------------- ------------- ------------  ------------  -------------
                                                100.0%        100.0%        100.0%        100.0%        100.0%
                                           ------------- ------------- ------------  ------------  -------------
Costs and expenses:
Restaurant cost of sales (1)                     34.7%         35.2%         35.0%         35.7%         34.3%
Restaurant operating expenses (1)                38.6          42.9          43.7          46.4          45.5
General and administrative expenses               9.4          10.1           9.7          10.0           9.4
Advertising and promotion expenses (1)            5.5           7.0           6.1           7.3           5.0
Depreciation and amortization (1)                 4.8           6.1           7.9           7.2           6.3
Owner expense (2)                                 -             -             -             -           169.1
Other charges (credits)                           -             7.2           9.3          16.4           -

Income (loss) from operations                    12.5          (4.0)         (7.9)        (19.3)          2.5
Total other (expense)                             (.7)         (3.7)         (5.1)         (5.3)         (5.0)
                                           ------------- ------------- ------------  ------------  -------------
Net income (loss) before income taxes
   and extraordinary items                       11.8          (7.7)        (13.0)        (24.6)         (2.5)

Net income (loss)                                 7.7%         (5.1)%       (10.3)%       (24.8)%         1.2%
                                           ============= ============= ============  ============  =============

Number of restaurants:
Restaurants open at the beginning of             333           450           520           542           481
   period
                                           ------------- ------------- ------------  ------------  -------------
Company restaurants opened (closed or
   transferred), net during period                81            55            (2)          (11)          (30)
Franchised restaurants opened (closed or
   transferred), net during period                36            15            24           (50)           16
                                           ------------- ------------- ------------  ------------  -------------
Total restaurants opened (closed or
   transferred), net during period               117            70            22           (61)          (14)
                                           ============= ============= ============  ============  =============
Total restaurants open at end of period          450           520           542           481           467
                                           ============= ============= ============  ============  =============
</TABLE>
--------------------------
(1)  As a percentage of restaurant sales.
(2)  As a percentage of owner fee income.

Results of Operations

Fiscal Year Ended December 29, 1996 Compared With Fiscal Year Ended 
December 31, 1995

     Systemwide  sales  declined 11% for 1996 to  approximately  $316.7  million
compared  with  approximately  $355.7  million  a year  ago.  This  decrease  is
attributable to the comparatively lower number of units in operation in 1996 and
to same store sales declines of 7%  systemwide.  The decline in same store sales
is primarily due to the lower customer counts  experienced  upon the elimination
of deep discounting programs in the third and fourth quarters of 1996 and to the
reduced media spending in the fourth quarter of 1996.

     Total Company  revenues  decreased 14% to  approximately  $162.8 million in
1996  compared  with  approximately   $188.9  million  in  1995.   Company-owned
restaurant  sales  decreased 14% to  approximately  $156.5  million due to fewer
Company units in operation,  a 6% decline in same store sales,  and a decline of
approximately $9 million due to the Company's  operating  agreement with CKE, as
discussed in "Liquidity and Capital Resources." Year-to-date, the Company opened
6 units, closed 8 units, and transferred  operational  responsibility to CKE for
28 units.  Franchisees,  exclusive of CKE,  opened 15 units and closed 26 units.
Five of the  Company  closures  which  were in the  Montgomery  DMA were sold in
September, 1996.

                                       21
<PAGE>

     Restaurant cost of sales, as a percentage of sales,  decreased to 34.3% for
1996 compared with 35.7% for 1995.  This decrease is  attributable  primarily to
various cost reduction  actions taken during the second half of 1996,  partially
offset by higher food and paper costs as a percentage  of sales in the first six
months of 1996. These cost reduction  actions include  selective changes in some
product and packaging specifications as well as re-negotiation of purchase terms
and selection of alternative vendors. Management intends to continue to consumer
test and implement such cost saving strategies in its stores, where appropriate.
The increase in cost of sales in the first half of 1996 resulted  primarily from
a carryover of deep  discounting  programs in the first quarter of 1996 and to a
shift in product  mix sold,  reflecting  the  impact of a larger  percent of Big
Buford(TM) sandwich sales in the first two quarters of 1996 compared to the same
period of 1995. While this product carries a significantly  higher dollar profit
per unit,  it does carry a higher  food cost  percentage  than did the  products
formerly comprising its share of the total product mix. The Company from time to
time negotiates  purchase contracts for certain items used in its restaurants in
the normal course of business.  Although some of these contracts contain minimum
purchase quantities,  such quantities do not exceed expected usage over the term
of such agreements.

     Restaurant  operating  expenses  were 45.5% of sales for 1996 compared with
46.4% for 1995.  The reduction is primarily due to  management's  cost reduction
actions in the labor area and better  fixed cost  coverage  in stores  operating
during the second half of the year,  partially  offset by increased  bonus costs
associated with store management  compensation.  This better fixed cost coverage
is the result of closing poorer performing units and of transferring operational
responsibility  for certain higher fixed cost  restaurants in Western markets to
CKE.  The  identified  and  implemented  changes  in  staffing  levels and labor
deployment in certain stores have yielded  savings in management and crew labor.
Management believes that these cost reduction actions should favorably influence
ongoing operating expense  performance;  however,  their impact may be partially
offset by future increases in the minimum wage.

     General and administrative  expenses on a year-to-date basis are lower than
1995, on both a dollar and a percentage of sales basis.  This decrease is caused
primarily by reductions in the corporate  and field  operations  staffs,  and by
lower levels of bad debt and other dead  project  charges,  partially  offset by
higher legal fees.

     Advertising expenses decreased  approximately $5.4 million to 5.0% of sales
for 1996 compared to 7.3% for 1995 due primarily to decreases in levels of radio
advertising,  outdoor advertising, and television advertising. During the fourth
quarter,  management  decided to limit  media  spending  until work with the new
advertising  agency  on  new  creative  and  brand  positioning  was  completed.
Company-wide  spending on the new advertising  campaign did not begin until late
February 1997.

     Depreciation  and  amortization  on  a  year-to-date   basis  decreased  to
approximately  $9.8 million as compared to  approximately  $13.0 million for the
same  period  in the  prior  year.  This  decrease  is  primarily  due to  asset
writedowns  associated  with the  adoption of SFAS 121 at the  beginning  of the
fourth quarter 1995, to a decrease in the number of properties being operated by
the  Company,  and to a  segregation  into  Owner  expense of  depreciation  and
amortization associated with the CKE-operated properties.

     Owner expenses of  approximately  $744,000 for 1996 represent the Company's
segregated  ownership  cost  related  to the 28  units  operated  by CKE.  These
expenses consist primarily of depreciation and amortization  associated with the
properties.

     Interest expense decreased 19.3% to approximately  $8.6 million for 1996 as
compared to  approximately  $10.7  million for 1995  primarily  due to the early
extinguishment  of debt, as previously  discussed.  See  "Liquidity  and Capital
Resources" and Note 10 to the accompanying  consolidated  financial  statements,
for further discussion.

     Interest income was higher for 1996 as compared to 1995 due to increases in
the average daily invested amounts.

     The  Company's  decrease  in Other is due  primarily  to the  current  year
storage costs related to excess modular buildings.

                                       22
<PAGE>

     The Company's  net tax  provision on a year to date basis is  approximately
$675,000  (obtained  by adding  the tax  provision  line to the tax  expense  of
approximately  $1,350,000 which has been netted against the extraordinary gain).
$575,000  of this  amount is  related to state  taxes  expected  to be  payable.
$100,000  relates to reduction of an IRS receivable for a NOL carryback to 1987,
1988, and 1989,  further  described in Note 13 to the accompanying  consolidated
financial statements.  See earlier discussion above concerning the extraordinary
gain.

Fiscal Year Ended December 31, 1995 Compared With Fiscal Year Ended 
January 1, 1995

     Systemwide  sales  declined  4% for 1995 to  approximately  $355.7  million
compared  with  approximately  $370.1  million a year ago. This decrease was the
result of store  closings  and a decline of 5% in  systemwide  same store sales,
offset in part by the full-year impact of 1994 store openings.

     Total revenue  increased 1% from  approximately  $186.3  million in 1994 to
approximately $188.9 million in 1995.  Company-owned  restaurant sales increased
2% to approximately $181.8 million. This increase was primarily  attributable to
the impact of the  acquisition  of ten units in Hampton  Roads,  Virginia from a
franchisee  as discussed in Note 2 to the  accompanying  consolidated  financial
statements,  offset in part by a 4% decline in  Company-owned  same store sales.
The ten  units  in  Hampton  Roads,  Virginia  were  included  in the  Company's
calculation  of same  store  sales  for the  full  year of  1995.  Royalty  fees
decreased 6% in 1995 due to a 6% decline in  franchise  same store sales and the
impact of the Hampton Roads, Virginia acquisition.

     Restaurant cost of sales, as a percentage of sales,  increased to 35.7% for
1995 compared with 35.0% for 1994.  This increase  resulted  primarily  from the
dramatic shift of product mix sold, reflecting the impact of the introduction of
our Big  Buford(TM)  sandwich  early in  1995.  While  this  product  carries  a
significantly  higher  dollar  profit per unit, it does carry a higher food cost
percentage  than did the  products  formerly  comprising  its share of the total
product  mix.  Secondary  factors  include  aggressive  discounting  during  the
Company's tenth anniversary promotion, selective product repricing in the fourth
quarter and  significantly  higher paper cost in 1995 due to a higher  commodity
cost and improved product packaging.

     Restaurant  operating  expenses  were 46.4% of sales for 1995 compared with
43.7% for 1994. This increase as a percentage of sales is primarily attributable
to higher labor,  occupancy and repair and maintenance  costs and to the decline
in same store sales resulting in the Company's  inability to adequately leverage
the  non-variable  components  of lease costs and labor costs.  The higher labor
costs were also  impacted by an increased  average wage rate,  higher  levels of
management  staffing,  and poor maintenance and execution of the Company's store
level labor management system.

     General  and  administrative  expenses  in  1995,  on both a  dollar  and a
percentage of sales basis, were higher than in 1994 primarily due to a charge of
approximately  $1.5 million  related to  uncertainty  of  collection  of certain
receivables,  offset partly by cost  reduction  initiatives  implemented  during
1995.

     Advertising  expenses  increased in 1995 to approximately  $13.2 million or
7.3% of sales, as compared with approximately  $10.9 million or 6.1% of sales in
1994.  This increase is primarily  attributable  to higher levels of advertising
expenditures related to new product introductions,  summer sweepstakes promotion
and the tenth anniversary  promotion.  Incremental  advertising dollars were not
effective in driving incremental sales dollars at rates previously achieved.

     Depreciation  and  amortization  decreased in 1995 to  approximately  $13.0
million as compared to  approximately  $14.1  million in 1994.  This decrease is
primarily due to a decrease in the number of properties in operation in 1995 and
asset  writedowns  associated  with the adoption of SFAS 121 at the beginning of
the fourth quarter, 1995.

     Interest  expense  increased  in 1995 to  approximately  $10.7  million  as
compared  to  approximately  $9.7  million  in 1994  primarily  due to the  debt
incurred as part of the Hampton Roads, Virginia acquisition, discussed above.

                                       23
<PAGE>

     Interest  income  was  higher  in  1995  than in 1994  due  primarily  to a
significant increase in the average daily invested amounts.

     The Company  recognized other income of  approximately  $200,000 in 1995 as
compared with other expense of approximately  $400,000 in 1994. The increase was
primarily  attributable to the loss recorded in 1994 of  approximately  $300,000
related  to the  sale  of  Beaman  (see  Note 2 to  the  consolidated  financial
statements).  The remainder of the increase is attributable to the difference in
investment gains and losses between years.

Liquidity and Capital Resources

     The Company's cash flow from operating activity was approximately  $543,000
for 1996 compared  with  approximately  $8.5 million for 1995 and  approximately
$6.3 million for 1994. The notable decrease in 1996 from 1995 resulted primarily
from  reductions in working  capital which more than offset higher net income in
1996. The change in working capital related  primarily to decreased  balances in
accounts  payable in 1996 due to decreased  food and paper costs as a percentage
of sales and to decreased  overall sales  volumes.  The decreased  overall sales
volumes  are  attributable  to the factors  discussed  above in the year to year
comparison.  The  decrease in 1995 from 1994 is  primarily a result of declining
net  income,  somewhat  offset by higher  accrued  liabilities  associated  with
advertising, workers compensation costs, and other miscellaneous accruals.

     Capital  expenditures  of  approximately  $2.3 million for 1996 were funded
primarily  through  sales of surplus  properties  and  existing  cash  balances.
Approximately  $1,286,000 of these  expenditures  were for the  construction  or
conversion  of new stores,  six of which opened in 1996 and five of which opened
within the first two months of fiscal  1997.  The  Company  spent  approximately
$220,000 for the replacement of three existing store  buildings,  constructed in
the late eighties,  with surplus modular  buildings.  Such actions were taken to
provide  increased  operational  flexibility and to reduce  maintenance costs in
these  units  given the low cash  outflow  necessary  to utilize  certain of the
surplus modular buildings. Remaining capital expenditures were primarily for the
purchase and installation of certain replacement equipment.

     The  Company  plans to open  fifteen  units in 1997 and reopen  three units
previously closed (see further discussion above). Full year capital expenditures
are  expected  to be in the range of  approximately  $6 million  to $8  million,
inclusive of replacement  capital.  This level of new unit  development  exceeds
that of 1996 (six units) and 1995 (three units) but is  significantly  less than
that of 1994 (36 units).

     In  January   1996,   the  Company   repurchased,   in  two   transactions,
approximately  $22 million face value of its 9 7/8% Senior Notes due in the year
2000. The Notes were purchased  from GIANT GROUP,  LTD.  ("GIANT") at a price of
$678.75 per $1,000  principal  amount,  representing the market closing price on
the last  business  day prior to the  repurchase  date.  The  first  transaction
involved the repurchase of approximately $16 million face value of the Notes for
approximately  $11.1  million  in cash.  The  second  transaction  involved  the
purchase of  approximately  $6 million face value of the Notes in exchange for a
short-term  note of  approximately  $4.1  million due in three  installments  of
principal and interest,  bearing  interest at prime.  The Company paid the final
installment  together with accrued  interest on this note on September 27, 1996.
Prior to the Senior Notes  repurchases,  the  Company's  Board of Directors  had
received  an  independent  opinion  from an  investment  banking  firm as to the
fairness of the transactions. Additionally, in four separate transactions during
the fourth quarter 1996, the Company repurchased approximately $4.7 million face
value of the Notes from various other bondholders for approximately $4.5 million
in cash. As a result of these debt repurchases,  the annualized ongoing interest
payments on the Senior Notes have been reduced by approximately $2.6 million per
year to approximately $5.8 million.

     Principal payments of debt and capital leases totaled  approximately  $21.8
million  during  1996,   inclusive  of  the  approximately  $11.1  million,  the
approximately  $4.1 million and the  approximately  $4.5 million  related to the
Senior Notes repurchased,  as discussed above. The Company is required to make a
mandatory  sinking fund payment on June 15, 1999 calculated to retire 33 1/3% in
aggregate  principal amount of the Senior Notes issued with the balance maturing
on June 15,  2000.  The  repurchase  discussed  above  reduces such sinking fund
requirement to approximately $1.6 million from approximately $28.3 million.

                                       24
<PAGE>


     In February  1996,  the Company  obtained a one-year  credit  facility from
GIANT.  Concurrent  with the completion of its Rights  Offering on September 20,
1996, this credit facility was terminated by agreement of the parties.

     The  Company is  actively  marketing  the assets  included  in the  caption
"Assets  held for  sale" in the  accompanying  consolidated  balance  sheet  and
expects realization in cash over the next 3 to 24 months, although actual timing
of such cash flows cannot be predicted. The assets contained in this caption are
recorded at  management's  current  estimate of fair market  value less costs to
sell.  There can be no  assurances  that these values will be  realized.  Of the
approximate  $3.7  million  generated  during  1996  from  the  sale of land and
buildings,  approximately  $1.9 million was generated  during the first quart of
1996 from the closing of the sales of eleven properties  auctioned in the fourth
quarter 1995.

     During 1996,  the Company  received funds  (approximately  $90,000) on land
contracts  which are the subject of an aggregate  amount of  approximately  $1.8
million of  sale/leaseback  financing.  The  interest  rate on such  facility is
approximately  12.5%.  The holder of such  contracts has been unable to complete
contractual requirements to fund such transactions.  During the first quarter of
1997,  the Company has received an additional  $100,000 in funds on one of these
properties. The Company continues to consider alternatives offered by the holder
including  substitution  of a different  buyer or extension of time available to
fund the agreements.

     On July 1, 1996, the Company  entered into a ten-year  operating  agreement
with Carl  Karcher  Enterprises,  Inc., a subsidiary  of CKE  Restaurants,  Inc.
(collectively referred to as "CKE"). Pursuant to the agreement, 28 Rally's-owned
restaurants  located in  California  and Arizona are being  operated by CKE. The
Company retains  ownership in the restaurants and receives from CKE a percentage
of gross revenues  referred to in the financial  statements as Owner fee income.
This income is offset by the  Company's  segregated  ownership  costs related to
these  units,  referred to as Owner  expenses in the  financial  statements  and
consists  primarily of noncash  expenses of depreciation and  amortization.  The
agreement has improved  profitability  and cash flow,  generating  approximately
$340,000 cash flow in the last six months of 1996.

     The Company  completed  its  Shareholder  Rights  Offering on September 20,
1996. The Offering raised over $10.8 million in gross proceeds,  offset by legal
and  other  issuance  costs  of  approximately  $437,000.  In  addition  to  the
approximate  $10.8  million of gross  proceeds  provided  by the  Offering,  the
Warrants  issued could  provide  approximately  $10.8  million for the Company's
future growth.  The proceeds from the Offering have been used to pay off debt of
$4.5  million  approximately  and  the  remainder  will be  used  for new  store
construction,  refurbishment of some existing  restaurants and for other general
corporate purposes, including possible further debt reduction.

     On October 21, 1996, the Company was notified by the indenture trustee that
the bondholder  consent it had been soliciting had been approved by the required
majority  of the  holders  of record of its 9 7/8%  Senior  Notes due 2000.  The
consent will allow two of the Company's current  stockholders,  CKE and Fidelity
National Financial,  Inc. and/or their affiliates, to acquire 35% or more of the
outstanding  shares of the Company's common stock without  triggering "Change in
control" provisions  requiring the Company to offer to purchase the Senior Notes
at 101% of their face value. This gives the Company greater flexibility to raise
capital in the future, and it gives two of its largest  stockholders the ability
to increase their investment in the Company.

     On December 20, 1996,  the Company  issued  warrants  (the  "Warrants")  to
purchase an aggregate of 1,500,000  restricted shares of its Common Stock to CKE
and Fidelity  National  Financial,  Inc. The Warrants have a three-year term and
are not  exercisable  until  December 20, 1997. The exercise price is $4.375 per
share,  the  closing  price  of the  Common  Stock on  December  20,  1996.  The
underlying  shares of Common Stock have not been  registered with the Securities
and Exchange Commission and, therefore,  are not freely tradable. Upon exercise,
the Warrants will provide  approximately  $6.6 million in additional  capital to
the Company.  See Note 4 to the accompanying  consolidated  financial statements
for further discussion.

                                       25
<PAGE>

     The Company  believes  existing cash balances and cash flow from operations
should be sufficient to fund its current operations and obligations. The ability
of the  Company to satisfy  its  obligations  under the Senior  Notes,  however,
continues to be dependent upon,  among other factors,  the Company  successfully
increasing revenues and profits.

                                       26
<PAGE>

<TABLE>
<CAPTION>

Item 8.    Financial Statements and Supplementary Data

                                          RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                                                 CONSOLIDATED BALANCE SHEETS
                                        AS OF DECEMBER 31, 1995 AND DECEMBER 29, 1996 
                                        (In  thousands,  except shares and per share amounts)

                                                                                                     December     December 29,
                                                                                                     31, 1995         1996
                                                                                                   -------------  --------------
<S>                                                                                                <C>            <C>    
ASSETS
Current assets:
   Cash and cash equivalents                                                                       $   8,811      $   2,285
   Restricted cash                                                                                       683          1,649
   Investments                                                                                         4,933          1,958
   Royalties receivable, including $483 and $0 from related parties at December 31, 1995 and
     December 29, 1996, respectively, net of a reserve for doubtful accounts of $922 and
     $1,405 at December  31, 1995 and December 29, 1996, respectively                                    818            437
   Accounts and other receivables including $23 and $565 from related parties at December 31,
     1995 and December 29, 1996, respectively, net of a reserve for doubtful accounts of $453
     and $301 at December 31, 1995 and December 29, 1996, respectively                                 2,131          1,698
   Inventory, at lower of cost or market                                                               1,056            794
   Prepaid expenses and other current assets                                                           1,131            999
   Assets held for sale                                                                                2,506            596
                                                                                                   -------------  --------------
         Total current assets                                                                         22,069         10,416

Assets held for sale                                                                                   3,517          1,426
Net property and equipment, at historical cost                                                        78,683         69,806
Notes receivable, including $175 and $127 from related parties at December 31, 1995 and
   December 29, 1996, respectively, net of a reserve for doubtful accounts of $542 and $853 at
   December 31, 1995 and December 29, 1996, respectively                                                 789            773
Goodwill, less accumulated amortization of $1,704 and $2,243 at December 31, 1995 and
  December 29, 1996, respectively                                                                     10,921         10,482
Reacquired franchise and territory rights, less accumulated amortization of $1,202 and $1,984
  at December 31, 1995 and December 29, 1996, respectively                                            12,261         11,439
Other intangibles, less accumulated amortization of $2,344 and $2,459 at December 31, 1995 and
  December 29, 1996, respectively                                                                      5,262          4,769
Other assets, less accumulated amortization of $1,638 and $1,101 at December 31, 1995 and
  December 29, 1996, respectively                                                                      3,890          3,147
                                                                                                   -------------  --------------
         Total assets                                                                              $ 137,392      $ 112,258
                                                                                                   =============  ==============

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
   Accounts payable                                                                                $    8,773         4,884
   Accrued liabilities                                                                                15,959         13,600
   Current maturities of long-term debt and obligations under capital leases                          17,544          1,484
                                                                                                   -------------  --------------
         Total current liabilities                                                                    42,276         19,968

Senior notes, less current maturities, net of discount of $768 and $429 at December 31, 1995
   and December 29, 1996, respectively                                                                69,034         57,897
Long-term debt, less current maturities                                                                5,749          4,775
Obligations under capital leases, less current maturities                                              5,631          5,408
Other liabilities                                                                                      8,030          4,845
                                                                                                   -------------  --------------
         Total liabilities                                                                           130,720         92,893
                                                                                                   -------------  --------------

Commitments and contingencies (Note 12)

Shareholders' equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized, no shares issued                             -              -
Common stock, $.10 par value, 50,000,000 shares authorized, 15,927,000 and 20,788,000 shares
   issued at December 31, 1995 and December 29, 1996, respectively                                     1,593          2,079
Additional paid-in capital                                                                            60,804         71,023
Less:  Treasury shares, 273,000 at December 31, 1995 and December 29, 1996                            (2,108)        (2,108)
Retained deficit                                                                                     (53,617)       (51,629)
                                                                                                   -------------  --------------
         Total shareholders' equity                                                                    6,672         19,365
                                                                                                   =============  ==============
         Total liabilities and shareholders' equity                                                $ 137,392      $ 112,258
                                                                                                   =============  ==============

          The  accompanying  notes to consolidated  financial  statements are an integral part 
                                   of these consolidated financial statements.
</TABLE>

                                       27
<PAGE>

<TABLE>
<CAPTION>

                                          RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF OPERATIONS
                       FOR THE YEARS ENDED JANUARY 1, 1995, DECEMBER 31, 1995, AND DECEMBER 29, 1996 
                                           (In thousands, except per share amounts)

                                                                                          Fiscal Years Ended
                                                                             ----------------------------------------------
<S>                                                                          <C>            <C>              <C>
                                                                             January 1,     December 31,     December 29,
                                                                                1995            1995             1996
                                                                             ------------  ---------------  ---------------

REVENUES:
   Restaurant sales                                                           $  178,476   $      181,778   $     156,445
   Franchise revenues and fees                                                     7,842           7,081            5,867
   Owner fee income                                                                    -               -              440
                                                                             ------------  ---------------  ---------------
         Total revenues                                                          186,318         188,859          162,752
                                                                             ------------  ---------------  ---------------

COSTS AND EXPENSES:
   Restaurant costs of sales                                                      62,518          64,813           53,712
   Restaurant operating expenses exclusive of depreciation and
     amortization and advertising and promotion expenses                          78,072          84,305           71,155
   General and administrative expenses                                            18,068          18,972           15,426
   Advertising and promotion expenses                                             10,898          13,188            7,767
   Depreciation and amortization                                                  14,139          13,006            9,838
   Owner expense                                                                       -               -              744
   Provision for restaurant closures and other                                    17,259          31,045               20
                                                                             ------------  ---------------  ---------------
         Total costs and expenses                                                200,954         225,329          158,662
                                                                             ------------  ---------------  ---------------

Income (loss) from operations                                                    (14,636)        (36,470)           4,090
                                                                             ------------  ---------------  ---------------

OTHER INCOME (EXPENSE):
   Interest expense                                                               (9,742)        (10,682)          (8,622)
   Interest income                                                                   477             538              614
   Other                                                                            (354)            234              (49)
                                                                             ------------  ---------------  ---------------
         Total other (expense)                                                    (9,619)         (9,910)          (8,057)
                                                                             ------------  ---------------  ---------------

Loss before income taxes and extraordinary items                                 (24,255)        (46,380)          (3,967)

PROVISION (BENEFIT) FOR INCOME TAXES                                              (4,982)            539             (675)
                                                                             ------------  ---------------  ---------------

Loss before extraordinary items                                                  (19,273)        (46,919)          (3,292)
                                                                                                                   
EXTRAORDINARY ITEMS (net of tax expense of $1,350)                                     -               -            5,280
                                                                             ------------  ---------------  ---------------
Net income (loss)                                                             $  (19,273)  $                $
                                                                                                 (46,919)           1,988
                                                                             ============  ===============  ===============

Earnings (loss) per common share:
   Earnings (loss) before extraordinary item                                 $             $                $    
                                                                                   (1.42)          (3.00)            (.19)
   Extraordinary item                                                                  -               -              .31
                                                                             ============  ===============  ===============

Earnings (loss) per common share                                             $             $                $
                                                                                   (1.42)          (3.00)             .12
                                                                             ============  ===============  ===============

Weighted average shares outstanding                                               13,564          15,620           17,007
                                                                             ============  ===============  ===============


               The accompanying notes to consolidated  financial  statements are an integral part 
                                      of these consolidated financial statements.

</TABLE>

                                       28
<PAGE>
<TABLE>
<CAPTION>


                                               RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                                            (In thousands)

                                                                                       
                                                                                 Treasury Stock and 
                                   Common Stock            Preferred Stock       Contingent Shares                            
                          --------------------------- ------------------------- ------------------- 
<S>                        <C>        <C>     <C>     <C>        <C>     <C>    <C>     <C>      <C>         <C>         <C>
                                                                                                    Additional  Retained
                            Shares    Shares             Shares   Shares                             Paid-In    Earnings    Total
                          Authorized  Issued  Amount  Authorized Issued  Amount  Shares   Amount     Capital    (Deficit)   Equity
                          ---------- -------- ------- ---------- ------- ------- ------ ----------  --------- ----------  ----------

Balances at January 2,1994   25,000   13,268  $1,327      -         -    $   -    (239)  $(2,009)     50,634    $ 12,575   $ 62,527
    
Issuance of common stock       -       2,569     257      -         -        -      -       -          9,976       -         10,233
Net loss                       -        -        -        -         -        -      -       -           -       (19,273)    (19,273)
                          ---------- -------- ------- ---------- ------- ------- ------ ----------   ---------- ----------  --------
Balances at January 1,       25,000   15,837   1,584      -         -        -    (239)   (2,009)     60,610     (6,698)     53,487
   1995

Amendment to the             25,000      -        -       -         -        -      -       -           -          -
   Charter (A)
Issuance of common stock       -          90        9     -         -        -      -       -            194       -            203
Treasury stock acquired        -         -        -       -         -        -     (34)      (99)       -          -            (99)
Net loss                       -         -        -       -         -        -      -       -           -       (46,919)    (46,919)
                          ---------- -------- ------- ---------- ------- ------- ------ ----------   ---------- ----------  --------
Balances at        
  December 31, 1995          50,000   15,927   1,593      -         -        -    (273)   (2,108)     60,804    (53,617)      6,672

Issuance of common stock       -          35       3      -         -        -      -       -             74       -             77
Authorization of
   preferred stock (B)         -         -        -    5,000,000    -        -      -       -          -           -
Shareholders Rights Offering   -       4,826     483      -         -        -      -       -          9,975       -         10,458
   
Issuance of
   compensatory stock         
   options and warrants        -         -        -      -          -        -      -       -            170       -            170
Net income                     -         -        -      -          -        -      -       -          -          1,988       1,988
                          ========== ======== ======= ========== ======= ======= ====== ==========   ========== ==========  ========
Balances at December         
   29, 1996                  50,000   20,788  $2,079   5,000,000    -     $  -    (273)  $(2,108)    $71,023   $(51,629)   $ 19,365
                          ========== ======== ======= ========== ======= ======= ====== ==========   ========== ==========  ========
                          

(A)  On May 13, 1995,  stockholders of the Company  approved a proposal to amend the  Certificate  of  Incorporation  to increase
     the number of  authorized shares of Common Stock from 25,000,000 shares to 50,000,000.

(B)  On July 10, 1996, stockholders of the Company ratified the authorization of 5,000,000 shares of Preferred Stock at a par value
     of $.10.

















          The  accompanying  notes to consolidated  financial  statements are an integral part 
                                   of these consolidated financial statements.
</TABLE>

                                       29
<PAGE>
<TABLE>
<CAPTION>

                                       RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOW
                                                     (In thousands)

                                                                                         Fiscal Years Ended
                                                                             --------------------------------------------
<S>                                                                          <C>           <C>             <C>
                                                                             January 1,    December 31,    December 29,
                                                                                1995           1995            1996
                                                                             ------------  -------------- ---------------
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Net income (loss)                                                              $ (19,273)    $ (46,919)    $    1,988
Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
     Depreciation and amortization                                                14,139        13,006         10,482
     Extraordinary items, before tax expense of $1,350                                 -             -         (6,630)
     Provision for restaurant closures and other                                  17,259        31,045             20
     Provision for losses on receivables                                             377         1,507            968
     Other                                                                           568         2,276          1,265
     Changes  in  assets  and   liabilities   net  of  effects   from   business
       combinations:
       (Increase) decrease in assets:
         Receivables                                                              (1,810)          775           (306)
         Inventory                                                                   (14)          (63)           262
         Prepaid expenses and other current assets                                   752           185            161
         Other assets                                                             (2,563)          292           (121)
       Increase (decrease) in liabilities:
         Accounts payable and accrued liabilities                                    187         7,815         (6,011)
         Deferred income taxes                                                    (1,524)         -                 -
         Other liabilities                                                        (1,824)       (1,424)        (1,535)
                                                                             ------------  -------------- ---------------
           Net cash provided by operating activities                               6,274         8,495            543
                                                                             ------------  -------------- ---------------

CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
   (Increase) decrease in investments                                              9,022          (848)         2,975
   Notes receivable                                                                  429           154            312
   Pre-opening costs                                                                (832)          (45)          (156)
   Capital expenditures                                                          (19,808)       (3,405)        (2,306)
   Proceeds from the sale of property and equipment                                2,525         4,266          4,392
   (Increase) decrease in intangible assets                                       (1,436)         (111)           (39)
   Acquisition of businesses, net of cash acquired                                (1,836)       (1,931)             -
   Proceeds from the sale of a business                                             -            2,730              -
                                                                             ------------  -------------- ---------------
           Net cash provided by (used in) investing activities                   (11,936)          810          5,178
                                                                             ------------  -------------- ---------------

CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
   (Increase) in restricted cash                                                    -             (683)          (966)
   Payment of organization and development costs                                      (4)           (3)             -
   Principal payments of debt                                                     (5,538)       (2,114)        (1,696)
   Senior Notes retirement                                                          -             -           (19,612)
   Issuance of common stock, net of costs of issuance                             10,233           203         10,535
   Principal payments on capital lease obligations                                  (393)         (604)          (508)
                                                                             ------------  -------------- ---------------
           Net cash provided from (used in) financing activities                   4,298        (3,201)       (12,247)
                                                                             ------------  -------------- ---------------
           Net increase (decrease) in cash                                        (1,364)        6,104         (6,526)

CASH AND CASH EQUIVALENTS, beginning of period                                     4,071         2,707          8,811
                                                                             ============  ============== ===============
CASH AND CASH EQUIVALENTS, end of period                                     $     2,707   $     8,811      $   2,285
                                                                             ============  ============== ===============




        The  accompanying  notes to  consolidated  financial  statements  are an integral part 
                                  of these consolidated financial statements.
</TABLE>

                                       30
<PAGE>


                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (tabular dollars in thousands, except per share amounts)



1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a)   Financial Statement Presentation and Organization

          The consolidated financial statements include Rally's Hamburgers, Inc.
          and its wholly-owned  subsidiaries,  each of which is described below.
          Rally's  Hamburgers,   Inc.  and  its  subsidiaries  are  collectively
          referred  to  herein  as the  context  requires  as  "Rally's"  or the
          "Company". All significant intercompany accounts and transactions have
          been eliminated.

          Rally's is one of the largest chains of double drive-thru  restaurants
          in the United  States.  At  December  29,  1996,  the  Rally's  system
          included 467  restaurants  in 19 states,  primarily in the Midwest and
          the  Sunbelt,   comprised  of  209  Company-owned  and  operated,  231
          franchised and 27  Company-owned  restaurants in Western markets which
          are operated as Rally's restaurants by CKE Restaurants,  Inc. ("CKE"),
          a significant shareholder of the Company, under an operating agreement
          which began July, 1996. One additional  Company-owned store covered by
          the operating  agreement  has been  converted to the Carl's Jr. format
          and  is  not  included  in  the  above  store  count.   The  Company's
          restaurants  offer high  quality  fast food.  The  Company  serves the
          drive-thru  and  take-out  segments  of the  quick-service  restaurant
          industry.  The Company opened its first restaurant in January 1985 and
          began offering franchises in November 1986.

          Rally's  Hamburgers,  Inc.,  Rally's of Ohio, Inc., Self Service Drive
          Thru,  Inc.  and Hampton  Roads Foods,  Inc.  own and operate  Rally's
          restaurants in various states. Additionally,  Rally's Hamburgers, Inc.
          operates as franchisor of the Rally's brand. Rally's Management,  Inc.
          provides  overall  corporate  management of the Company's  businesses.
          Rally's Finance, Inc. was organized for the purpose of making loans to
          Rally's franchisees to finance the acquisition of restaurant equipment
          and modular  buildings.  RAR,  Inc. was  organized  for the purpose of
          acquiring  and  operating  a  corporate   airplane  and  is  currently
          inactive. The Company's wholly-owned subsidiary, ZDT Corporation,  was
          formed  to  own  the  Zipps  brand  and  franchise  system.  MAC 1 was
          organized  for the  purpose of  acquiring  a  manufacturer  of modular
          buildings.  The  manufacturing  business was sold in January 1995 (see
          Note 2).

          The  preparation  of  the  financial  statements  in  conformity  with
          generally accepted  accounting  principles requires management to make
          estimates and assumptions  that affect the reported  amounts of assets
          and liabilities  and disclosures of contingent  assets and liabilities
          at the date of the financial  statements  and the reported  amounts of
          revenues and expenses  during the  reporting  period.  Actual  results
          could   differ  from  those   estimates,   when  actual   transactions
          anticipated  are   consummated.   In  addition,   despite   management
          diligence,  changes in estimates do and will  continue to occur due to
          changes in available  relevant data and consummation of the events and
          transactions.  The  statements  are prepared on a going concern basis.
          Certain  of  the  most  significant  estimates  include  useful  lives
          assigned to  depreciable/amortizable  assets, fair value less costs to
          sell of  long-lived  assets  held for sale,  fair value of  long-lived
          assets  held  for  use,   future  net   occupancy   costs  related  to
          closed/disposable properties,  accruals for the Company's self-insured
          and high deductible  insurance  programs,  and  disclosures  regarding
          commitments and contingencies.

      b) Revenue Recognition

          The  Company  recognizes  franchise  fees  as  income  on  the  date a
          restaurant  is opened,  at which time the  Company has  performed  its
          obligations relating to such fees. Area development fees are generated
          from the  awarding of  exclusive  rights to  develop,  own and operate
          Rally's  restaurants in certain  

                                       31
<PAGE>

          geographic areas pursuant to an Area Development Agreement.  Such fees
          are  recognized as income on a pro rata basis as the  restaurants  are
          opened or upon the  cancellation or expiration of an Area  Development
          Agreement.   Both  franchise  fees  and  area   development  fees  are
          non-refundable.   The  Company   also   receives   royalty  fees  from
          franchisees in the amount of 4% of each franchised  restaurant's gross
          revenues,  as defined in the  Franchise  Agreement.  Royalty  fees are
          recognized as earned.

     c)  Property and Equipment

          Property and equipment are depreciated using the straight-line  method
          for financial  reporting  purposes and accelerated  methods for income
          tax  purposes.  The  estimated  useful lives for  financial  reporting
          purposes are the shorter of 20 years or the lease life plus  available
          renewal  options for buildings and property held under capital leases,
          eight years for furniture and  equipment,  five years for software and
          computer systems and the life of the lease for leasehold improvements.
          Expenditures for major renewals and betterments are capitalized  while
          expenditures for maintenance and repairs are expensed as incurred.

     d)  Interest Costs

          Interest costs incurred  during the  construction  of restaurants  are
          capitalized  as a  component  of the cost of the  restaurants  and are
          amortized on a straight-line  basis over the estimated useful lives of
          the  restaurants.  The amounts  capitalized for the fiscal years ended
          January  1,  1995,  December  31,  1995 and  December  29,  1996  were
          approximately $490,000, $30,000 and $7,000, respectively.

     e)  Inventory

          Inventory  is valued at latest  invoice  cost which  approximates  the
          lower of first-in, first-out cost or market.

     f)  Supplemental Disclosures of Cash Flow Information

                                                   Fiscal Years Ended
                                          --------------------------------------
                                           January 1,  December 31, December 29,
                                              1995        1995         1996
                                          ------------ ------------ ------------

Interest paid (net of amount capitalized)    $ 9,760    $ 10,679       $ 8,639
Income taxes paid                                163         212           983
Capital lease obligations incurred               -         1,616           111

              The purchase of HRF described in Note 2 was recorded as follows:

                                                                      Fiscal
                                                                   Year Ended
                                                                 ---------------
                                                                   December 31,
                                                                       1995
                                                                 ---------------

                              Fair value of assets acquired            $ 9,133
                              Cash paid                                 (2,125)
                                                                 ===============
                              Liabilities assumed                      $ 7,008
                                                                 ===============

          As a result of the sale of  Beaman  discussed  in Note 2, the  Company
          recorded  the net  present  value of a  non-interest  bearing  note of
          approximately  $347,000.  The Company  recorded in 1996  approximately
          $547,000 in notes  receivable  primarily  as the result of the sale of
          five  of  its  restaurants  in  Montgomery,  Alabama.  These  non-cash
          transactions  have been  excluded from the  consolidated  statement of
          cash flows.

                                       32
<PAGE>

          During fiscal 1995 and 1996, the Company accepted notes due within two
          to five years,  bearing interest at rates previously  specified in the
          underlying   franchise   agreements,   for  certain  receivables  from
          franchises in the aggregate amount of approximately  $542,000 for 1995
          and approximately $340,000 for 1996. There were no such notes in 1994.

          For purposes of the consolidated  statement of cash flows, the Company
          considers all highly liquid debt instruments with an original maturity
          of  three  months  or  less  at  the  date  of  purchase  to  be  cash
          equivalents.  Cash  equivalents  at December 31, 1995 and December 29,
          1996 were approximately $6.8 million and $976,000, respectively.

     g)  Earnings (Loss) Per Common Share

          Earnings (loss) per common share is calculated based upon the weighted
          average shares and common  equivalent  shares  outstanding  during the
          periods.

     h)   Goodwill,  Reacquired  Franchise  Rights,  Other Intangibles and Other
          Assets

          Goodwill, reacquired franchise and territory rights, other intangibles
          and other assets are being  amortized using the  straight-line  method
          over the following periods:

                                                                  Amortization
                                                                     Period
                                                                 --------------

                      Goodwill                                    5, 20-25 years
                      Reacquired franchise and territory rights      15-20 years
                      Other intangibles                               3-25 years
                      Other assets                                    5-25 years

          Subsequent  to the  intangibles'  acquisition,  the Company  evaluates
          whether later events and circumstances have occurred that indicate the
          remaining  estimated useful life of goodwill and other intangibles may
          warrant  revision or that the remaining  balance of goodwill and other
          intangibles  may  not  be  recoverable.  When  factors  indicate  that
          goodwill  or  other  intangibles  should  be  evaluated  for  possible
          impairment,  the Company uses an estimate of the related  undiscounted
          cash  flows  over  the  remaining  life  of  the  goodwill  and  other
          intangibles  in measuring  whether the goodwill and other  intangibles
          are  recoverable.  The amount of any such  impairment is determined as
          the  difference  between  carrying  value and fair  value  based  upon
          discounted  cash flows.  No such impairment was recorded in any period
          presented except as disclosed in Note 16.

     i)  Owner Fee Income and Expense

          Revenue  received as a result of the operating  agreement  with CKE is
          referred  to as Owner  fee  income  in the  accompanying  consolidated
          financial  statements.  Expenses related to the ongoing  investment in
          the  CKE-operated  restaurants  consist  primarily of depreciation and
          amortization and are referred to as Owner expenses in the accompanying
          consolidated financial statements.

     j)  Advertising Costs

          It is the Company's policy to expense advertising costs as incurred.

     k)  Reclassification

          Certain items have been reclassified in the accompanying  consolidated
          financial  statements for prior periods in order to be comparable with
          the  classification  adopted  for the fiscal year ended  December  29,
          1996. Such  reclassifications had no effect on previously reported net
          income.

                                       33
<PAGE>

2.   ACQUISITION AND DISPOSITION

     On February  13,  1995,  the Company  acquired  all of the shares of common
     stock of Hampton Roads Foods, Inc. (a Louisiana corporation) and certain of
     the assets of HRF, Inc. (a Virginia corporation),  collectively referred to
     as "HRF",  for  approximately  $7.2 million,  of which  approximately  $2.1
     million was paid in cash and the  remainder to be paid over the ensuing six
     years pursuant to a secured  promissory  note,  bearing  interest at 9%. In
     addition,  the Company assumed approximately  $654,000 of notes payable and
     other  liabilities  and HRF's lease  obligations,  including  capital lease
     obligations of approximately  $1.3 million.  HRF owned and operated a total
     of ten  Rally's  restaurants  and  owned  the  exclusive  right to  develop
     additional Rally's  restaurants in the Hampton Roads and Norfolk,  Virginia
     areas. The acquisition of HRF was accounted for as a purchase.

     The total purchase price of  approximately  $9.1 million has been allocated
     in  the   accompanying   balance   sheet  as  net  property  and  equipment
     (approximately   $2.1   million)  and  as   intangible   and  other  assets
     (approximately  $6.7  million).   The  remainder  of  the  purchase  price,
     approximately  $319,000,  was  allocated  to various  current  assets.  The
     intangible  and other asset amounts  include a  non-compete  (approximately
     $150,000) which is being amortized over five years and reacquired franchise
     and territory rights (approximately $6.6 million) which are being amortized
     over 15 years.

     The impact on operations of this acquisition was not significant for any of
     the periods presented,  and, therefore,  proforma amounts are not presented
     giving effect to this acquisition.

     On January 30, 1995,  the Company sold all of the shares of common stock of
     Beaman  Corporation,  its  wholly-owned  modular building  subsidiary,  for
     approximately $3.1 million, of which approximately $2.7 million was paid in
     cash,  and the  remainder to be paid  pursuant to a  non-interest  bearing,
     unsecured promissory note.

3.   RESTAURANT CLOSURES AND OTHER

     Certain  charges in  fiscals1994,  1995 and 1996 have been  aggregated  and
     segregated into the caption  "Provision for Restaurant  Closures and Other"
     in  the  accompanying  Statements  of  Operations.  These  items  represent
     estimates  of the impact of  management  decisions  which have been made at
     various  points in time in  response  to the  Company's  sales  and  profit
     performance  and the  then-current  revenue  building and profit  enhancing
     strategies.

     In summary and chronologically, the decisions that had been reached in 1994
     were to abandon  additional  real estate  development  projects and certain
     investment in  infrastructure  (approximately  $5.3 million) and to abandon
     additional  projects and franchise or otherwise dispose of up to 60 Company
     restaurants   (approximately  $12.0  million).  During  1995,  the  Company
     concluded  that much of its 1994 plan of disposal  would not be executable.
     As a result,  the Company  decided to (i) close up to 16 of the original 60
     restaurants  included  in the 1994  disposal  plan,  (ii)  close  nine poor
     performing  restaurants  in its  core  markets,  (iii)  writeoff  estimated
     exposure resulting from the default of a  subleasee/franchisee  in a former
     Company  market,  (iv) record  additional  writedowns  of modular  building
     value,  (v)  record  writedowns  to sales  price  less  cost to sell of all
     properties  auctioned in fourth quarter,  1995 (vi) record asset writedowns
     and occupancy  exposure  related to the default of a tenant for five of the
     units  closed  under  the 1994  plan and  (vii)  record  other  changes  in
     estimates related to the Company's surplus properties.  The charges for the
     above 1995 items totaled  approximately  $17.3  million.  Also reflected in
     this caption for fiscal 1995 is an approximate $13.7 million charge related
     to the Company's  adoption of Statement of Financial  Accounting  Standards
     No. 121 ("SFAS 121) further discussed in Note 16.

     Included  in this  caption  for fiscal  1996 are  charges of  approximately
     $679,000   related  to  the   writedown   and  sale  of  assets  offset  by
     approximately  $659,000  resulting  from a  reduction  in surplus  property
     reserves related to Management's decision to re-open three units previously
     closed and to continue  to operate a fourth  unit that had been  designated
     for closure.  See also  "Management's  Discussion and Analysis of Financial
     Condition and Results of Operations--"Restaurants Closures and Other."

                                       34
<PAGE>

4.   RELATED PARTY TRANSACTIONS

     a)   Issuance of Warrants

          On December 20, 1996, the Company issued warrants (the  "Warrants") to
          purchase an  aggregate of  1,500,000  restricted  shares of its Common
          Stock to CKE and Fidelity National  Financial,  Inc. The Warrants were
          granted as an incentive to CKE and Fidelity to continue to participate
          in the  identification  and exploitation of synergistic  opportunities
          with the  Company.  The Warrants  have a  three-year  term and are not
          exercisable  until December 20, 1997. The exercise price is $4.375 per
          share, the closing price of the Common Stock on December 20, 1996. The
          underlying  shares of Common Stock have not been  registered  with the
          Securities  and Exchange  Commission  and,  therefore,  are not freely
          tradable. Upon exercise, the Warrants would provide approximately $6.6
          million in additional  capital to the Company.  The Company obtained a
          valuation  analysis  from  an  investment  banking  firm  of  national
          standing.  Such  analysis  estimated  the value of the  Warrants to be
          approximately $960,000. Approximately $24,000 has been expensed during
          1996 within General and Administrative  expenses.  The remaining value
          will be  expensed  in fiscal  1997 over the  remainder  of the vesting
          period of the underlying Warrants.

     b)   West Coast Operating Agreement

          On July  1,  1996,  the  Company  entered  into a  ten-year  Operating
          Agreement  with Carl Karcher  Enterprises,  Inc., a subsidiary  of CKE
          Restaurants,  Inc.  (collectively  referred  to as "CKE").  CKE is the
          operator  of  the  Carl's  Jr.  restaurant  chain.   Pursuant  to  the
          agreement,  28 Rally's owned  restaurants  located in  California  and
          Arizona are being operated by CKE. Such agreement is cancelable  after
          an initial  five-year  period,  at the discretion of CKE. A portion of
          these restaurants,  at the discretion of CKE, will be converted to the
          Carl's Jr. format.  To date, one  restaurant has been  converted.  The
          agreement was approved by a majority of the  independent  Directors of
          the  Company.  Prior  to  the  agreement,  the  Company's  independent
          Directors had received an opinion as to the fairness of the agreement,
          from a financial  point of view,  from an  investment  banking firm of
          national standing.

          Under the terms of the Operating  Agreement,  CKE is  responsible  for
          conversion costs  associated with  transforming the restaurants to the
          Carl's  Jr.  format,  as well  as the  operating  expenses  of all the
          restaurants.  Rally's  retains  ownership of all 28 restaurants and is
          entitled to receive a percentage of gross  revenues  generated by each
          restaurant.  Subsequent to the agreement,  the Company's revenues have
          been,  and  will  continue  to  be,  reduced  by  the  absence  of the
          restaurants' sales,  somewhat offset by the fee paid to the Company by
          CKE.  For the first six months of the current  year,  the  restaurants
          covered by this Operating  Agreement had sales of approximately  $10.5
          million.  The Company  anticipates that the agreement will continue to
          positively  impact  both net income and cash flow.  While the  overall
          impact  of  the  agreement  is  not  expected  to be  material  to the
          financial  statements,  it will allow  management to  concentrate  its
          efforts in more fully developed  Rally's  markets.  The agreement will
          also  allow the  Company  to take  advantage  of any  improvements  in
          restaurant   operations   attained  by  CKE  by   implementing   these
          improvements in Company  stores.  In the event of a sale by Rally's of
          any of the 28 restaurants, Rally's and CKE would share in the proceeds
          based upon the relative value of their respective capital  investments
          in such restaurant.

     c)   Option Grants to Non-employees

          During  1996,  the  Company   granted   150,000   options  to  certain
          individuals  not  employed  by  the  Company  for  services  provided.
          Approximately  $84,000 has been  expensed  for these grants in General
          and   Administrative   Expenses  in  the  accompanying   Statement  of
          Operations.  Such  options  were  granted at the market  values on the
          dates of grant, were immediately exercisable and expire in five years.

                                       35
<PAGE>

     d)   Other Transactions

          The Company has had transactions with certain companies or individuals
          which are related parties by virtue of having  stockholders in common,
          by  being   officers/directors  or  because  they  are  controlled  by
          significant  stockholders or  officers/directors  of the Company. Such
          transactions  which  impacted  the  Company's  consolidated  financial
          statements are summarized  below.  Information with respect to related
          party rent is  disclosed  in Note 12. The Company and its  franchisees
          each pay 1/2% of sales to the Rally's  National  Advertising Fund (the
          "Fund"),  established  for  the  purpose  of  creating  and  producing
          advertising   for  the  chain.   The  Fund  is  not  included  in  the
          consolidated    financial    statements,    although   the   Company's
          contributions  to  the  Fund  are  included  in  the  Advertising  and
          Promotion  Expenses  in  the  Company's  consolidated   Statements  of
          Operations.

                                            December 31,     December 29,
                                               1995              1996
                                        ------------------  ----------------
          Balance Sheet Amounts
          Royalties receivable                $ 483           $    -
          Accounts receivable                    23               565
          Notes receivable                      175               127
          Accounts payable                      307                95
          Accrued liabilities                   -                  60

                                                     Fiscal Years Ended
                                  ----------------------------------------------
                                    January 1,   December 31,     December 29,
                                       1995          1995             1996
                                  ------------- -------------    ---------------
Revenue and Transaction Amounts
Repurchase of Senior Notes (gross)  $   -          $    -          $   6,339
Royalty fees                          2,129          2,407             -
Owner fee income                        -               -                440
Rental income                           195            262             -
Interest income                          93             16                49
                                    ==========     ==========      =============
                                    $ 2,417        $ 2,685         $   6,828
                                    ==========     ==========      =============

Expense Amounts
Legal                               $   923        $   777         $   1,024
Owner expense                           -               -                744
Interest expense                        -               -                180
Compensatory stock options and
   warrants                             -               -                170
Other                                    14             -                -
                                    ==========     ==========      =============
                                    $   937        $    777        $   2,118
                                    ==========     ==========      =============

5.   RESTRICTED CASH

     Restricted cash consists of amounts held in various Certificates of Deposit
     as  collateral  for Letters of Credit and daily  Automated  Clearing  House
     ("ACH") transactions.

6.   INVESTMENTS

     Excess  funds are being  invested in U.S.  Treasury  and  investment  grade
     corporate    debt    securities.    These    securities   are   deemed   as
     "available-for-sale" under SFAS 115, "Accounting for Certain Investments in
     Debt and Equity  Securities"  and are  reported at fair  value.  Unrealized
     holding  gains and losses,  excluding  those 

                                       36
<PAGE>

     losses considered to be other than temporary,  are reported as a net amount
     in a separate  component of shareholders'  equity. No net unrealized losses
     were reported for any period  presented.  Provisions for declines in market
     value are made for losses  considered to be other than  temporary.  No such
     provision was necessary for the years ended  December 31, 1995 and December
     29,  1996.   The   provision  for  the  year  ended  January  1,  1995  was
     approximately  $95,000.  The market value of the portfolio  was  determined
     based on quoted  market  prices for these  investments.  Realized  gains or
     losses   from  the  sale  of   investments   are  based  on  the   specific
     identification method.

     The carrying  value is equal to the market value of investments at December
     31, 1995 and December 29, 1996 and consist of the following:

          December 31, 1995
          United States government and its agencies   $  4,933
          Corporate debt instruments                      -
                                                     ==========
          Total                                       $  4,933
                                                     ==========

          December 29, 1996
          United States government and its agencies   $    500
          Corporate debt instruments                     1,458
                                                     ==========
          Total                                       $  1,958
                                                     ==========

     The contractual  maturities of these  investments at December 29, 1996 were
     as follows:

                                  1997      $    500
                                  2002           248
                                  2012           299
                                  2013           597
                                  2017           314
                                            =========
                                               1,958
                                            =========

     The  proceeds  from the sale of  investments  and  related  gross gains and
     losses for the twelve months ended  January 1, 1995,  December 31, 1995 and
     December 29, 1996 were as follows:

                                                    Fiscal Years Ended
                                        ----------------------------------------
                                        January 1,   December 31,   December 29,
                                           1995          1995           1996
                                        ---------- --------------   ------------

          Proceeds from the sale of     $  17,798    $   15,653     $  10,531
            investments
          Gross gains realized               137             56          -
          Gross losses realized             (364)         -                (4)


                                       37
<PAGE>


7.   NET PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

                                                December 31,      December 29,
                                                    1995              1996
                                               ----------------  ---------------

     Land                                      $       14,310    $       14,074
     Buildings and leasehold improvements              46,520            47,463
     Equipment, furniture and fixtures                 45,036            41,312
                                               ----------------  ---------------
                                                      105,866           102,849
     Less accumulated depreciation                    (32,049)          (37,518)
                                               ----------------  ---------------
                                                       73,817            65,331
                                               ----------------  ---------------
     Property held under capital lease                  6,208             6,145
     Less accumulated amortization                     (1,342)           (1,670)
                                               ----------------  ---------------
                                                        4,866             4,475
                                               ================  ===============
     Net property and equipment                $       78,683    $       69,806
                                               ================  ===============

8.   ACCRUED LIABILITIES

     Accrued liabilities consist of the following:

                                           December 31,    December 29,
                                               1995            1996
                                          --------------- ---------------

     Payroll and payroll taxes            $        3,013   $        2,245
     Closed store reserve                          2,767            1,964
     Workers compensation                          2,102            2,367
     Advertising                                   1,819              316
     Other                                         6,258            6,708
                                          =============== ===============
                                          $       15,959   $       13,600
                                          =============== ===============

9.   OTHER LIABILITIES

     Other liabilities consist of the following:

                                      December 31,    December 29,
                                          1995            1996
                                     --------------- ---------------

     Closed store reserve            $        6,908    $       3,881
     Unfavorable lease loss                     890              748
     Other                                      232              216
                                     =============== ===============
                                     $        8,030    $       4,845
                                     =============== ===============

10.  SENIOR NOTES

     On March 9, 1993,  the  Company  sold  approximately  $85 million of 9 7/8%
     Senior,  Notes due 2000 (the  "Notes").  The  Company is required to make a
     mandatory  sinking  fund  payment  on June 15,  1999 to  retire  33 1/3% in
     aggregate  principal amount of the Notes issued.  The Notes are carried net
     of the  related  discount,  which is being  amortized  over the life of the
     Notes.  Interest  is payable  June 15 and  December  15. The Notes  include
     certain restrictive  covenants which, among other  restrictions,  limit the
     Company's ability to obtain  additional  borrowings and to pay dividends as
     well as impose certain change of control provisions, as defined.

                                       38
<PAGE>

     On January 29, 1996, the Company  repurchased,  in two  transactions,  at a
     price of approximately  $678.75 per $1,000 principal amount,  approximately
     $22 million face value of its 9 7/8% Senior Notes due in the year 2000 from
     GIANT GROUP, LTD. ("GIANT"). The price paid in each transaction represented
     the  market  closing  price on  January  26,  1996.  The first  transaction
     involved  the  repurchase  of  approximately  $16 million face value of the
     Notes for  approximately  $11.1  million in cash.  The  second  transaction
     involved  the purchase of  approximately  $6 million face value of Notes in
     exchange for a short-term note of approximately $4.1 million,  due in three
     installments of principal and interest, issued by Rally's. The Company paid
     the final installment on this note, together with accrued interest thereon,
     on September  27, 1996.  The  purchases  were approved by a majority of the
     independent Directors of the Company. Prior to the purchases, the Company's
     independent  Directors  had  received an opinion as to the  fairness of the
     transactions,  from a financial point of view,  from an investment  banking
     firm of national  standing.  Due to the  repurchases  in January 1996,  the
     redemption price of approximately  $15.2 million has been classified in the
     caption "Current Maturities of Long-Term Debt and Obligations Under Capital
     Leases" in the accompanying consolidated balance sheet for fiscal 1995.

     Additionally, in four separate transactions during the fourth quarter 1996,
     the Company repurchased  approximately $4.7 million face value of the Notes
     from various other bondholders for approximately $4.5 million in cash.

     These  purchases  resulted  in  extraordinary  gains  in  1996  net of tax,
     totaling approximately $5.3 million or $.31 per share. As a result of these
     debt  repurchases,  the annualized  ongoing interest payments on the Senior
     Notes  have  been  reduced  by  approximately  $2.6  million  per  year  to
     approximately $5.8 million. In addition, these repurchases have reduced the
     sinking fund requirement discussed above to approximately $1.6 million from
     approximately $28 million.

     The  remaining  outstanding  Notes are publicly  traded and at December 29,
     1996 had a market value of approximately  $54.5 million based on the quoted
     market price for such notes.

     On  September  5,  1996 by  Consent  Solicitation  Statement,  the  Company
     solicited  consent of its bondholders  whereby the beneficial  ownership of
     35% or more of the voting stock of the Company by GIANT,  Fidelity National
     Financial,  Inc., CKE and/or any of their affiliates would not constitute a
     change of control for purposes of Section 4.14 of the Indenture. On October
     21, 1996, the bondholder  consent was approved by a majority of the holders
     of record as of the date of the Consent Solicitation.


                                       39
<PAGE>


11.  LONG-TERM DEBT

     Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                      December 31,      December 29,
                                                                                          1995             1996
                                                                                      --------------   --------------    
     <S>                                                                              <C>              <C>  
     Notes payable to banks, maturing at various dates through February 10, 2000,
          secured by property and/or  equipment,  bearing  interest ranging from
          1/2% above prime to 9.25%. The notes are payable in monthly  principal
          and  interest  installments  ranging  from  $848 to $41,033.                    $ 1,883        $  1,006  
          

     Note payable  to  finance  company  due  October  1998,  secured by certain
          equipment,  bearing interest at a rate of 7.3%. The note is payable in
          monthly principal and interest installments of $6,762.                              384             133 

     Note payable to Company  for  acquisition  of certain  markets,  secured by
          certain property and equipment,  maturing  November 30, 1998,  bearing
          interest of 8.3%.  The note is payable in monthly principal and
          interest installments of $11,494.                                                   205             79 

     Secured notes payable to a bank used to finance  equipment  and/or  modular
          buildings for franchisees (the Franchisee Loans),  maturing at various
          dates through July 15, 2000,  bearing interest at prime plus 1/2%. The
          notes  are  payable  in  monthly  principal  installments  of  $4,875.
          Interest is payable monthly.                                                        261             195

     Notespayable to former owners for acquisition of market,  secured by common
          stock  of  Hampton  Roads  Foods,   maturing  March  13,  2001,   with
          outstanding balances due after last monthly payments, bearing interest
          of 9.0%.  The notes are  payable in  monthly  principal  and  interest
          installments ranging from $4,742 to $50,211.                                      4,814           4,461
                                   
               
                                                                                      --------------  --------------
                                                                                            7,547           5,874
     Less - Current portion                                                                (1,798)         (1,099)
                                                                                             -                -
                                                                                      ==============  ==============
                                                                                      $     5,749      $    4,775
                                                                                      ==============  ==============
</TABLE>
     At December 29, 1996,  the prime rate was 8.25%.  There were no  short-term
     borrowings in the year ended December 31, 1995.

     The  following are the  maturities  of long-term  debt for each of the next
     five years and thereafter:

                                    Year
                              -------------------

                                     1997              $     1,099
                                     1998                      722
                                     1999                      727
                                     2000                      590
                                  Thereafter                 2,736
                                                       ============
                                                       $     5,874
                                                       ============

     The  Company is subject to  certain  restrictive  covenants  under its debt
     agreements.

     The market value of the Company's long-term debt approximated book value at
     December 29, 1996.  Debt related to the  acquisition of Hampton Roads Foods
     was entered  into in 1995 and bears  interest  at rates  which  approximate
     current  rates for debt with similar  terms.  The majority of the remaining
     long-term debt has  contractual  rates which vary based on  fluctuations in
     market rates.


                                       40
<PAGE>


12.  COMMITMENTS AND CONTINGENCIES

     (a)  Lease Commitments

          The  Company  leases  certain  land  and  buildings   generally  under
          agreements  with terms of or renewable to 15 to 20 years.  Some of the
          leases contain  contingent  rental  provisions based on percentages of
          gross sales. The leases generally obligate the Company for the cost of
          property taxes, insurance and maintenance.  Following is a schedule by
          year of future minimum lease  commitments under all leases at December
          29, 1996:

                                                     Capital           Operating
                    Year                              Leases             Leases
---------------------------------------------       -----------       ----------

1997                                                $    1,087             8,475
1998                                                     1,010             7,870
1999                                                       973             7,216
2000                                                       906             6,413
Thereafter                                               6,772            33,052
                                                    ----------        ==========
Total minimum lease commitments                         10,748        $   63,026
                                                                      ==========
Less amounts representing interest,
   discounted at rates ranging from 10% to 12%          (4,955)
                                                    -----------
Present value of minimum lease payments                  5,793
Current portion of capital lease obligations              (385)
                                                    ===========
Long-Term lease obligations                         $    5,408
                                                    ===========

          The  discount  rates  applicable  to  the  Company's   capital  leases
          approximate  currently available market rates. Minimum operating lease
          payments  have not been  reduced by minimum  sublease  rentals of $2.7
          million due in the future under noncancellable subleases.

          Rent expense consists of:

                                                Fiscal Years Ended
                                      ----------------------------------------
                                      January 1,     December      December
                                         1995        31, 1995      29, 1996
                                      -----------  ------------- -------------

     Minimum rentals - related parties   $   261      $     292     $    470
     Minimum rentals - others              6,514          6,641        4,681
     Contingent rentals - others             136            173          122
                                      ===========  ============= ============
                                         $ 6,911      $   7,106     $  5,273
                                      ===========  ============= ============

     (b)  Litigation

          In January and February 1994, two putative class action  lawsuits were
          filed,  purportedly  on behalf of the  stockholders  of Rally's in the
          United  States  District  Court for the Western  District of Kentucky,
          against  Rally's,  Burt  Sugarman  and GIANT and  certain  of  Rally's
          present  and former  officers  and  directors  and its  auditors.  The
          complaints allege defendants  violated the Securities  Exchange Act of
          1934,  among other claims,  by issuing  inaccurate  public  statements
          about the  Company in order to  arbitrarily  inflate  the price of its
          common stock.  The plaintiffs seek unspecified  damages.  On April 15,
          1994,  Rally's  filed a motion to dismiss  and a motion to strike.  On
          April 5, 1995,  the Court struck  certain  provisions of the complaint
          but otherwise denied Rally's motion to dismiss. In addition, the Court
          denied  plaintiffs'  motion for class  certification;  the  plaintiffs
          renewed this motion,  and despite  opposition by the  defendants,  the
          Court granted such motion for class  certification  on April 16, 1996,
          certifying  a class  from July 20,  1992 to  September  29,  1993.  In
          October 1995, the plaintiffs filed a motion to disqualify Christensen,
          Miller,  Fink,  Jacobs,  Glaser,  Weil & Shapiro,  LLP  ("Christensen,
          Miller") as counsel for  defendants  based on a purported  conflict of
          interest   allegedly  arising  from  the  representation  of  multiple
          defendants as well as Ms. Glaser's  position as both a former director
          of Rally's and a partner in Christensen,  Miller.  Defendants filed an
          opposition to the motion,  and the motion to  disqualify  Christensen,
          Miller was denied.  The action was stayed  between May 30 and July 31,
          1996 to facilitate settlement  discussions.  One settlement conference
          has been  conducted;  no others  are  currently  scheduled.  The Court
          denied  the  motion  in the fall of 1996  and  refused  to  disqualify
          Christensen,  Miller. Fact 

                                       41
<PAGE>

          discovery  is set to  close  in April  1997.  No  trial  date has been
          scheduled  yet.  Management  is unable to predict  the outcome of this
          matter  at the  present  time  or  whether  or not  certain  available
          insurance coverages will apply. The defendants deny all wrongdoing and
          intend to defend  themselves  vigorously in this matter.  Discovery is
          proceeding.  Because  these matters are in a  preliminary  stage,  the
          Company is unable to  determine  whether a  resolution  adverse to the
          Company will have a material  effect on its results of  operations  or
          financial  condition.  Accordingly,  no provisions for any liabilities
          that may result upon  adjudication  have been made in the accompanying
          financial statements.  An estimate of defense costs reimbursable under
          the Company's directors' and officers' insurance is included in "Other
          Assets" in the accompanying consolidated financial statements.

          In July 1994,  the Company  entered  into an  agreement  with Red Line
          Burgers,  Inc.  ("Red Line")  whereby Red Line leased from the Company
          all of its assets being  operated as Rally's  restaurants  in Houston,
          Texas. Additionally,  the agreement called for Red Line to convert Red
          Line's  eight  competing  units in the  Houston  market to the Rally's
          brand.  Red Line failed to make certain lease payments and on June 20,
          1995, the Company filed an action in the United States  District Court
          for the  Southern  District  of  Texas,  Galveston  Division,  seeking
          recovery  of  damages  from Red Line for its  breach of the leases and
          subleases  entered into with the Company.  The action alleges that Red
          Line also  committed  events of default  under the terms of all of its
          Franchise  Agreements with the Company.  As a result of such defaults,
          the Company  terminated  such Franchise  Agreements,  and on August 3,
          1995,  the Company  filed suit in the United  States  District  Court,
          Western  District of Kentucky,  alleging breach of contract due to Red
          Line's  failure to pay  royalties and other  payments  required by the
          Franchise  Agreements  and its failure to pay  approximately  $400,000
          plus interest owed on certain  promissory  notes issued to the Company
          in lieu of such payments.  The Company also seeks  accountability  for
          approximately  $660,000  in  conversion  costs paid by the Company for
          conversion  of  Red  Line's  Houston  restaurants.  Subsequent  to the
          commencement   of  the   foregoing   actions,   Red  Line   filed  for
          reorganization  under Chapter 11 of the United States Bankruptcy Code.
          In connection with such proceedings, the Company's actions against Red
          Line have been  stayed.  In  November,  1996,  Red Line  filed a First
          Amended  Disclosure  Statement and First Amended  Liquidating  Plan of
          Reorganization  (the "Plan") which  disputed Red Line's  obligation to
          pay the Company any of the foregoing monies. By Bankruptcy Court Order
          entered February 28, 1997 (the  "Confirmation  Order"),  the Company's
          general  unsecured  claims were allowed in the amount of approximately
          $615,000.  The  Confirmation  Order also  approved the Plan.  The Plan
          provides for,  among other things,  mutual  releases among the Company
          and  Red  Line  (such  releases  do not  affect  the  allowed  general
          unsecured  claims  described above) and the sale of Red Line's assets.
          Cash from those sales will be  insufficient to pay all secured claims,
          taxes and administrative claims. Some of the Red Line assets are to be
          acquired by New Red Line, Inc., an entity  involving  certain insiders
          and/or  affiliates  of Red  Line.  Unsecured  creditors  of  Red  Line
          (including  the Company) will receive under the Plan a minority  stock
          interest  in New Red  Line,  Inc.  At this  time,  the  likelihood  of
          realizing  any value on account of such  minority  stock  interest  is
          considered  extremely  speculative.  The receivable balances have been
          fully reserved.

          In February  1996,  Harbor  Finance  Partners  ("Harbor")  commenced a
          derivative action,  purportedly on behalf of Rally's against GIANT and
          certain of Rally's officers and directors before the Delaware Chancery
          Court. Harbor named Rally's as a nominal defendant. Harbor claims that
          the  directors  and  officers of both  Rally's  and GIANT,  along with
          GIANT,  breached their fiduciary duties to the public  shareholders of
          Rally's by causing  Rally's to repurchase  from GIANT certain  Rally's
          Senior Notes at an inflated  price.  Harbor seeks "millions of dollars
          in damages",  along with rescission of the repurchase transaction.  In
          the fall of 1996,  all  defendants  moved to dismiss the  action.  The
          Chancery  Court  conducted a hearing on November 26, 1996, but has not
          yet ruled on the pending  motions.  The Company  denies all wrongdoing
          and intends to  vigorously  defend the action.  It is not  possible to
          predict the outcome of this action at this time.

          Rally's filed a lawsuit on August 12, 1996 against Arkansas Investment
          Group, Inc. ("AIGI"), a franchisee that currently operates ten Rally's
          restaurants  located  in  Arkansas.   The  lawsuit  seeks  to  recover
          royalties and  contributions to the Rally's National  Advertising Fund
          owed by AIGI pursuant to the applicable  franchise  agreements,  which
          total approximately  $500,000 with accrued interest as of December 29,
          1996.  After falling in arrears on its royalties and advertising  fund
          contributions,  Rally's and AIGI  negotiated  a written  agreement  to
          allow AIGI to make payments  under a revised  payment  schedule.  AIGI
          also  defaulted on that written  

                                       42
<PAGE>

          obligation.  AIGI has filed an  Answer  and  Counterclaim  in which it
          alleges it does not owe the  royalties and  advertising  contributions
          due  to  its  alleged  disagreement  with  operational  and  marketing
          decisions  of Rally's  and  Rally's  alleged  failure  to rebate  sums
          obtained from suppliers. AIGI has asserted causes of action for breach
          of contract, violation of the Arkansas Franchise Practices Act, unjust
          enrichment  and fraud.  The  Counterclaim  alleges  that AIGI has been
          damaged in excess of approximately $75,000 (the minimum jurisdictional
          amount  for  federal  court),  but no  specific  amount of  damages is
          identified in the Counterclaim.  Rally's denies AIGI's allegations and
          intends to vigorously defend the Counterclaim.  Because the litigation
          is in a preliminary  stage, the Company is unable to determine whether
          a resolution adverse to the Company will have a material effect on its
          results  of  operations  or  financial  condition.   Accordingly,   no
          provisions for any liabilities that may result upon  adjudication have
          been made in the accompanying financial statements.

          In December 1994,  Rally's entered into two franchise  agreements with
          Kader Investments, Inc. ("Kader") for the development and operation of
          Rally's  Hamburgers  restaurants  in Anaheim,  California  and Tustin,
          California.  Rally's assisted the franchisee in developing and opening
          the  restaurants.  On  November  27,  1996,  Kader  filed a  six-count
          Complaint against Rally's in the California  Superior Court for Orange
          County  (Case  No.  772257)   alleging   material   misrepresentation,
          respondent  superior,  breach  of  contract,  breach  of  the  implied
          covenant of good faith and fair dealing, fraud and unfair competition.
          These claims arise out of  allegations  concerning  Rally's  offer and
          sale of two franchises (under a two-store development agreement),  and
          Rally's actions during the term of the agreements. The Complaint seeks
          as  relief  rescission  of  the  parties'  franchise  and  development
          agreements;  general damages of at least $1,494,277 and $1,400,000 for
          the material misrepresentation and fraud counts, respectively; general
          damages  in  unspecified  amounts  as to the  other  counts;  punitive
          damages in unspecified  amounts; and attorneys' fees. Rally's filed an
          Answer,  and  intends  to file a  Cross-Complaint  alleging  breach of
          contract.  The court has  permitted  the parties to hold  discovery in
          abeyance for a short period pending settlement discussions. Rally's is
          currently attempting to settle the claim. However, the outcome of such
          settlement  discussion is uncertain at this time.  Should  discussions
          not  result in a  settlement,  Rally's  intends to  vigorously  defend
          against the claims.  Because the litigation is in a preliminary stage,
          the Company is unable to determine whether a resolution adverse to the
          Company will have a material  effect on its results of  operations  or
          financial  condition.  Accordingly,  no provisions for any liabilities
          that may result upon  adjudication  have been made in the accompanying
          financial statements.

          The Company is involved in other litigation  matters incidental to its
          business.  With  respect  to such  other  suits,  management  does not
          believe the  litigation  in which it is involved  will have a material
          effect upon its results of operation or financial condition.

     (c)  Other Commitments

          The  Company  is  contingently  liable  on  certain  franchisee  lease
          commitments totaling approximately  $366,000. The Company from time to
          time  negotiates  purchase  contracts  for  certain  items used in its
          restaurants  in the normal course of business.  Although some of these
          contracts contain minimum purchase quantities,  such quantities do not
          exceed expected usage over the term of such agreements.

13.  INCOME TAXES

     The asset and  liability  method  contemplated  by  Statement  of Financial
     Accounting  Standards No. 109 requires  recognition  of deferred tax assets
     and liabilities for the expected future tax  consequences of  substantially
     all temporary  differences  between the tax bases and  financial  reporting
     bases of assets and liabilities (excluding goodwill).


                                       43
<PAGE>


     The major  components of the Company's  computation  of deferred tax assets
     and liabilities at December 31, 1995 and December 29, 1996 are as follows:
<TABLE>
<CAPTION>

                                                                            December 31,    December 29,
                                                                                1995           1996
                                                                            --------------  ------------
     <S>                                                                    <C>             <C>    
     Excess of tax depreciation over book depreciation                      $   11,390      $   8,430
     Acquired intangibles with no tax basis                                      2,199          2,070
     Other                                                                           8             30
                                                                            ==============  ============
       Gross deferred tax liabilities                                       $   13,597      $  10,530
                                                                            ==============  ============

     Net operating loss carryforwards                                       $   13,070      $  12,824
     Amounts accrued for financial reporting purposes not yet                   17,122         12,885
        deductible for tax purposes
     Alternative minimum tax and targeted jobs tax credit carryforwards            937            937
     Other                                                                       1,267          1,514
                                                                            ------------    ------------
     Gross deferred tax assets                                                  32,396         28,160
     Less valuation allowance                                                   18,799         17,630
                                                                            ==============  ============
       Net deferred tax asset                                               $   13,597      $  10,530
                                                                            ==============  ============
</TABLE>
     The primary  changes from December 31, 1995 in the  components of the above
     assets  and  liabilities  relate  to the  Company's  changes  and  business
     strategies,  restructuring,  other  restaurant  closings  (See  Note 3) and
     impact of SFAS 121 (See Note 16) offset by current year tax depreciation in
     excess  of  book   depreciation.   The   alternative   minimum  tax  credit
     carryforward has no expiration.  The net operating loss  carryforwards will
     expire approximately $641,000 in 2008,  approximately $20.2 million in 2009
     and approximately  $17.5 million in 2010 and approximately  $1.6 million in
     2011. The targeted jobs tax carryforward expires approximately  $118,000 in
     2006,  approximately $184,000 in 2007 and approximately $200,000 in 2008. A
     valuation allowance of approximately $17.6 million has been established due
     to the  uncertainty  of  realizing  the  benefit  associated  with  the net
     operating loss carryforwards generated in the current and previous years.

     Income tax expense consists of the following:

                                           Fiscal Years Ended
                                 ----------------------------------------
                                 January 1,     December      December
                                    1995        31, 1995      29, 1996
                                 ------------  ------------  ------------

     Current                      $ (3,458)     $    539      $   (675)
     Deferred                       (1,524)         -                -
                                 ============  ============  ============
     Total tax (benefit) expense  $ (4,982)     $    539      $   (675)
                                 ============  ============  ============

     Income tax expense for year ended  December 29, 1996  consists of a benefit
     of  $1,350,000  related  to the  extraordinary  gain  recognized  from  the
     purchase  of bonds,  $575,000 in state  income tax expense and  $100,000 in
     expense  related to a reduction in a receivable from the IRS resulting from
     a NOL carryback to the years 1987, 1988 and 1989.

     A  reconciliation  of the  provisions  for income  taxes  with the  federal
     statutory rate is as follows:

                                                   Fiscal Years Ended
                                        ----------------------------------------
                                        January 1,   December 31,     December
                                           1995          1995         29, 1996
                                        -----------  -------------- ------------

Provision (benefit) computed at          $  (8,247)      $ (15,770)   $  (1,349)
   statutory rate
State and local income taxes, net of
   federal income tax benefit                  162             736          380
Valuation allowance                          3,446          15,352          182
Other                                         (343)            221          112
                                        ===========  ============== ============
                                         $  (4,982)      $     539    $    (675)
                                        ===========  ============== ============

                                       44
<PAGE>

14.  STOCK-BASED COMPENSATION PLANS

     The Company  currently  has three stock  option  plans in effect,  the 1990
     Stock Option Plan (the "Employees'  Plan"),  the 1990 Stock Option Plan for
     Non-Employee  Directors (the "1990  Directors'  Plan"),  and the 1995 Stock
     Option  Plan for  Non-Employee  Directors  (the  "1995  Directors'  Plan").
     Additionally,  the Company has an employee  stock  purchase plan (the "1993
     Purchase Plan").  Although there are existing options outstanding under the
     1990  Directors'  Plan, no additional  grants will be made pursuant to this
     plan. The Company  accounts for these plans under APB Opinion No. 25, under
     which  approximately  $66,000 of  compensation  cost has been recognized in
     fiscal 1996 related to 157,000  options granted to directors under the 1995
     Directors Plan.  Such  compensation  represents the difference  between the
     market  values  on the dates of grant and the  measurement  date,  July 10,
     1996, the date when the grants were ultimately approved by the shareholders
     at the annual  meeting.  No  compensation  cost was recognized in any other
     period presented.

     During 1996, a total of 350,000  additional options were granted to five of
     the current directors. These options were not granted pursuant to an option
     plan. The options were granted at a price equal to the stock's market price
     on the date of grant. The options were  immediately  exercisable and expire
     after five years.

     Had compensation cost for all option grants to employees and directors been
     determined consistent with FASB Statement No. 123, the Company's net income
     and earnings per share would have been reduced to the  following  pro forma
     amounts:

                                                          1995          1996
                                                          ----          ----

         Net Income (Loss):      As Reported          $ (46,919)     $  1,988
                                 Pro Forma              (47,154)         (699)
         Earnings (Loss) Per
            Common Share:        As Reported          $  (3.00)      $   .12
                                 Pro Forma               (3.02)         (.04)

     Because the  Statement  123 method of  accounting  has not been  applied to
     options  granted  prior  to  January  2,  1995,  the  resulting  pro  forma
     compensation  cost  may not be  representative  of that to be  expected  in
     future years.  Additionally,  the pro forma amounts  include  approximately
     $16,000 and $12,000 in 1995 and 1996, respectively, related to the purchase
     discount offered under the 1993 Purchase Plan.

     The Company may sell up to 500,000  shares of stock to its employees  under
     the 1993 Purchase Plan. The Company has sold  approximately  36,000 shares,
     51,000 shares, and 25,000 shares in 1994, 1995, and 1996, respectively, and
     has sold  approximately  126,000 shares through December 29, 1996 since the
     inception  of this plan in 1993.  The  Company  sells  shares at 85% of the
     stock's market price at date of purchase.  The weighted  average fair value
     of  shares  sold in 1995  and  1996  was  approximately  $2.06  and  $3.03,
     respectively.

     Options to purchase an  aggregate  of 5.5 million  shares of the  Company's
     Common Stock may be granted  under the stock option  plans,  at a price not
     less than the market  value on the date of grant.  The  Company has granted
     options on  approximately  2.4 million shares under the stock option plans.
     Outstanding options expire ten years after grant under the Employees' Plan,
     except with regard to shares  granted to the Company's  President and Chief
     Executive  Officer  pursuant to his employment  agreement  which expires in
     five years.  Options outstanding under the two directors' plans expire five
     years after grant.  Options are  exercisable  over various  periods ranging
     from immediate to three years after grant  depending upon their grant dates
     and the plan under which the options were granted.

     On August 26, 1994,  the Board of Directors  authorized an option  exchange
     program,  subject to  shareholder  approval,  pursuant to which  options to
     purchase 1,042,000 common shares at prices ranging from $8.00 to $21.50 per
     share were terminated.  These options were reissued, subject to shareholder
     approval, at $4.125 per share, which was the closing price of the Company's
     Common Stock on August 26, 1994. The option  exchange  program was approved
     by the shareholders at the annual meeting held on May 13, 1995.

                                       45
<PAGE>

     A summary of the status of all options  granted to employees and directors,
     as well as those options granted to non-employees  (see Note 4), at January
     1, 1995,  December 31, 1995,  and December 29, 1996, and changes during the
     years then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
                                                December 31, 1995        December 29, 1996
                                              ----------------------  ----------------------
                                                          Wtd. Avg.              Wtd. Avg.
                                               Shares     Ex. Price    Shares    Ex. Price
                                              ---------  ----------   --------  ------------
       <S>                                    <C>        <C>          <C>       <C>   
       Outstanding at beginning of year          2,225    $  4.74       2,219     $ 4.24
       Granted at price equal to market            676       2.88       2,154       2.63
       Granted at price greater than market        ---        ---         350       1.75
       Exercised                                   ---        ---          (9)      3.05
       Forfeited                                 (412)       3.93        (201)      3.34
       Expired                                   (270)       5.38        (667)      5.62
                                              =========               ========      
       Outstanding at end of  year               2,219       4.24       3,846       2.92
                                              =========               ========
       Exercisable at end of  year               1,048       5.09       2,359       3.21
       Weighted average of fair value of
       options granted                           $1.76                  $1.31
</TABLE>

     The Company had approximately  1,910,000 options  outstanding as of January
     2, 1994 at  prices  ranging  form  $2.67 to  $21.50.  During  fiscal  1994,
     approximately  1,925,000 options were granted at prices ranging from $2.875
     to $11.25;  approximately  34,000  options were exercised at prices ranging
     form $2.66 to $6.92; and  approximately  1,576,000  options were terminated
     with prices ranging from $4.125 to $21.50.  These transactions  resulted in
     approximately  2,225,000  options  outstanding as of January 1, 1995,  with
     prices  ranging  form  $2.67 to $9.333.  At January 1, 1995,  approximately
     756,000 options were exercisable at prices ranging from $2.67 to $6.50.

     The following table summarizes  information about stock options outstanding
     at December 29, 1996:
<TABLE>
<CAPTION>
                                 Options Outstanding                                      Options Exercisable
       ------------------------------------------------------------------------     --------------------------------
                                                 Wtd. Avg.
          Range of           Outstanding         Remaining         Wtd. Avg.         Exercisable        Wtd. Avg.
       Exercise Prices          as of           Contractual         Exercise            as of            Exercise
                            Dec. 29, 1996           Life             Price          Dec. 29, 1996         Price
       ----------------    ----------------    ---------------    -------------     ---------------    -------------
        <S>                <C>                 <C>                <C>               <C>                <C>              
        $1.25 to 2.50              982              6.9 years         $1.88                 80             $2.36
         2.50 to 3.75            2,047              5.1                2.93              1,679              2.92
         3.75 to 5.00              817              5.1                4.16                599              4.16
                           ================                                         ===============

        $1.25 to 5.00            3,846              5.6                2.92              2,358              3.21
                           ================                                         ===============
</TABLE>
     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option pricing model with the following  weighted-average
     assumptions used for grants in fiscal 1995 and 1996, respectively: expected
     volatility of 45.0 percent and 45.7 percent;  risk-free  interest  rates of
     6.75  percent and 6.82 percent for options  granted to  employees  and 6.54
     percent and 6.59  percent for options  granted to  directors;  and expected
     lives for  fiscal  1995 and 1996 of eight  years  for  options  granted  to
     employees  and five years for  options  granted to  directors.  An expected
     dividend yield of 0 percent per share was used for all periods based on the
     Company's history of no dividend payments.

                                       46
<PAGE>


15.  UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
                                            First        Second       Third        Fourth
                                           Quarter      Quarter      Quarter      Quarter       Total
                                         -----------  -----------  -----------  -----------  -----------
     <S>                                 <C>          <C>          <C>          <C>          <C>    
     Year Ended December 31, 1995
        Revenues                          $ 42,470     $ 49,843     $ 49,851     $ 46,695    $ 188,859
        Income (loss) from operations         (993)       1,205      (14,803)     (21,879)     (36,470)
        Net loss                            (3,509)      (1,244)     (17,316)     (24,850)     (46,919)
        Loss per common share                 (.22)        (.08)       (1.11)       (1.59)       (3.00)

     Year Ended December 29, 1996
        Revenues                          $ 41,912     $ 47,357     $ 38,781     $ 34,702    $ 162,752
        Income (loss) from operations       (3,369)       2,413        2,632        2,414        4,090
        Net income                             838          111          414          625        1,988
        Earnings (loss) per common
          share:
          Earnings (loss) before              (.24)         .01          .01          .01         (.19)
            extraordinary item
          Extraordinary item                   .29         -             .02          .02          .31
                                         ===========  ===========  ===========  ===========  ===========
        Earnings (loss) per common share       .05          .01          .03          .03          .12
                                         ===========  ===========  ===========  ===========  ===========
</TABLE>
16.  IMPAIRMENT OF LONG-LIVED ASSETS

     The Company adopted  Statement of Financial  Accounting  Standards No. 121,
     "Accounting for the Impairment of Long-Lived  Assets and Long-Lived  Assets
     to Be Disposed of " (SFAS 121),  at the  beginning  of the fourth  quarter,
     1995. This Statement establishes accounting standards for the impairment of
     long-lived assets, certain identifiable intangibles and goodwill related to
     those  assets to be held and used,  and for  long-lived  assets and certain
     identifiable  intangibles  to  be  disposed  of.  SFAS  121  requires  that
     impairment for long-lived  assets and  identifiable  intangibles to be held
     and  used,  if any,  be based on the fair  value of the  asset.  Long-lived
     assets and  certain  identifiable  intangibles  to be disposed of are to be
     reported at the lower of  carrying  amount or fair value less cost to sell.
     For purposes of applying this statement,  the Company determines fair value
     utilizing the present value of expected  future cash flows using a discount
     rate commensurate with the risks involved.

     Long-lived  assets considered for impairment under SFAS 121 are required to
     be grouped at the "lowest level for which there are identifiable cash flows
     that are  largely  independent  of the cash  flows  of other  groups."  The
     Company believes the most correct  application of this standard is obtained
     by examining  individual  restaurants where circumstances  indicate that an
     impairment issue may exist. This belief is primarily based on the fact that
     it is at  individual  restaurant  level that most  investment  and  closure
     decisions  are made on an ongoing  basis.  In  addition,  if an asset being
     tested for recoverability was acquired in a business combination  accounted
     for using the purchase method,  the goodwill that arose in that transaction
     is included as part of the asset being  evaluated  and in  determining  the
     amount of any impairment.

     Prior to the  issuance of SFAS 121,  the  Company  recorded  impairment  of
     long-lived  assets  deemed  to be  permanently  impaired.  Generally,  such
     assessment  of  permanent  impairment  arose  concurrent  with a management
     decision  to dispose  of such an asset at which time the asset was  written
     down to estimated net realizable value. In general, other long-lived assets
     were  reviewed  for  impairment  only if there  were  dramatic  changes  in
     operating  results  or  cash  flows  of  a  segregable  group  of  outlets,
     indicating a likelihood that a permanent impairment has occurred.

     The Company's past practices of estimating net realizable  value for assets
     to be disposed of are consistent with the Statement's requirements to write
     down such assets to fair market value less costs to sell and no  adjustment
     regarding  such assets was necessary  upon adoption of the  Statement.  The
     expected  disposal  dates for these assets are over the next 3 to 24 months
     and consist mainly of surplus land,  buildings and equipment.  The carrying
     amounts  of such  assets  to be  disposed  of are shown  separately  on the
     accompanying  balance sheets. The majority of assets held for sale resulted
     from  constriction of the Company's  development  plan and other associated
     store closings further discussed in Note 3.

                                       47
<PAGE>

     The Company's fourth quarter, 1995 review relating to assets to be held and
     used indicated that 37 of its 238 operating  restaurants  met the Company's
     criteria for  impairment  review.  All of the  indicated  restaurants  were
     deemed to be impaired based on current  estimates of their  underlying cash
     flows and a provision for  impairment  was recorded in the fourth  quarter,
     1995 of  approximately  $13.7  million  related to writedowns of the assets
     associated  with these  restaurants.  Approximately  $824,000 of associated
     intangible assets was included in this writedown. The writedown is included
     in the caption "  Restaurant  Closures  and Other." The  writedown of these
     assets resulted in reduced  depreciation  and  amortization  expense in the
     fourth quarter, 1995 of approximately $351,000.

     The  magnitude of the writedown  noted above  resulted  primarily  from two
     factors:  (1) the  review  of  assets  to be held  and  used at  individual
     restaurant  level,  a lower  level than used in the past and (2) the recent
     historical and continuing  poor  operating  performance of the  restaurants
     themselves (including the restaurant's 1995 full year performance).

     During the first quarter of 1996, two additional restaurants,  due to their
     continued  poor  operating  performance,  were  determined  to be impaired,
     resulting  in charges of  approximately  $754,000  included in the caption,
     "Restaurant Closures and Other". No additional  restaurants were determined
     to be impaired  in 1996.  As  required  by the SFAS 121,  the Company  will
     continue  to   periodically   review  its  assets  for   impairment   where
     circumstances indicate that such impairment may exist.

17.  SHAREHOLDER RIGHTS OFFERING

     A Shareholder  Rights Offering (the  "Offering") was completed on September
     20, 1996. The Company distributed to holders of record of its Common Stock,
     as of the  close  of  business  on  July  31,  1996  (the  "Record  Date"),
     transferable  subscription rights ("Right(s)") to purchase Units consisting
     of one share of Common  Stock and one  Warrant to  purchase  an  additional
     share of Common  Stock.  Stockholders  received one Right for each share of
     Common Stock held on the Record  Date.  For each 3.25 Rights held, a holder
     had the right to purchase one Unit for $2.25 each.  The Offering  consisted
     of 4,825,805 Units.  Each Warrant may be exercised to acquire an additional
     share of Common  Stock at an exercise  price of $2.25 per share and expires
     on September  26, 2000.  The Company may redeem the  Warrants,  at $.01 per
     Warrant,  upon 30 days' prior written notice in the event the closing price
     of the  Common  Stock  equals or  exceeds  $6.00 per share for 20 out of 30
     consecutive trading days ending not more than 30 days preceding the date of
     the notice of redemption. The Offering was fully subscribed and raised over
     approximately  $10.8  million in gross  proceeds  offset by legal and other
     issuance costs of  approximately  $437,000.  The proceeds from the Offering
     have  been  used to pay off  debt of  approximately  $4.5  million  and the
     remainder will be used for new store  construction,  refurbishment  of some
     existing  restaurants and for other general corporate  purposes,  including
     possible  further debt  reduction.  The net proceeds from the Offering were
     attributable  primarily  to the sale of the  Company's  common  stock.  The
     amount  attributable  to the  warrants is included in  "Additional  paid-in
     capital."

     In  addition  to the  approximately  $10.8  million  provided by the Rights
     Offering,  the Warrants issued,  if exercised,  could provide an additional
     $10.8 million in  proceeds..  The Company had  15,683,869  shares of Common
     Stock  outstanding  on the Record  Date.  Immediately  after the  Offering,
     20,509,674 shares of Common Stock and 4,825,805  Warrants were outstanding.
     As of December 29, 1996, 4,818,597 of these Warrants were outstanding.  The
     Warrants are publicly traded and at December 29, 1996 had a market value of
     approximately  $11.7  million  based on the  quoted  market  price for such
     warrants.

18.  SUBSEQUENT EVENTS

     On March 25, 1997, the Company agreed in principle to a merger  transaction
     pursuant to which the COmpany  would become a  wholly-owned  subsidiary  of
     Checkers Drive-In Restaurants,  Inc., a Delaware corporation  ("Checkers").
     Checkers, together with its franchisees,  operates approximately 478 double
     drive-thru  hamburger  restaurants  primarily  located in the  Southeastern
     United  States.  Under the terms of the  letter of intent  executed  by the
     Company and  Checkers,  each share of the  Company's  Common  Stock will be
     converted into three shares of Checker's common stock upon  consummation of
     the  merger.  The  transaction  is subject  to  negotiation  of  definitive
     agreements,   recipt  of  fairness  opinions  by  each  party,  receipt  of
     stockholder and other required approvals and other customary conditions.

                                       48
<PAGE>








                    Report of Independent Public Accountants




To Rally's Hamburgers, Inc.:

     We have audited the  accompanying  consolidated  balance  sheets of Rally's
Hamburgers,  Inc. (a Delaware  corporation)  and subsidiaries as of December 31,
1995  and  December  29,  1996,  and  the  related  consolidated  statements  of
operations,  shareholders'  equity and cash  flows for each of the three  fiscal
years in the period  ended  December  29,  1996.  These  consolidated  financial
statements  and the  schedule  referred to below are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements and schedule based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the financial position of Rally's Hamburgers, Inc. and
subsidiaries  as of December 31, 1995 and December 29, 1996,  and the results of
their  operations and their cash flows for each of the three fiscal years in the
period ended December 29, 1996, in conformity with generally accepted accounting
principles.

     Our audit was made for the  purpose  of  forming  an  opinion  on the basic
financial statements taken as a whole.  Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.



                                                                                
Louisville, Kentucky
     February 12, 1997 
         (except with  respect to the matter  discussed in Note 18, as to which
          the date is March 25, 1997)

                                       49
<PAGE>



     Item 9. Changes in and  Disagreements  with  Accountants  on Accounting and
Financial Disclosures

     None.


                                    PART III

     Items  10,  11,  12  and  13.  Directors  and  Executive  Officers  of  the
Registrant;  Executive  Compensation;  Security  Ownership of Certain Beneficial
Owners and Management; and Certain Relationships and Related Transactions.

     The  information  required by these items is omitted because the Company is
filing a definitive  proxy  statement  pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this Report which  includes
the required  information.  The required information  contained in the Company's
proxy statement is incorporated herein by reference.


                                     PART IV


     Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>

                                                                                 Page Number in
                                                                                 This Form 10-K
                                                                                ------------------
<S>          <C>                                                                <C>
(a)(1)       Index to Consolidated Financial Statements:
             Report of Independent Public Accountants                                  49
             Consolidated Balance Sheets as of December 31, 1995 and
                December 29, 1996                                                      27
             Consolidated Statements of Operations for each of the three
                years in the period ended December 29, 1996                            28
             Consolidated Statements of Shareholders' Equity for each of the
                three years in the period December 29, 1996                            29
             Consolidated Statements of Cash Flow for each of the three
                years in the period ended December 29, 1996                            30
             Notes to Consolidated Financial Statements                                31
(a)(2)       Index to Financial Statement Schedules:
             Report of Independent Public Accountants                                  49
             Schedules as of and for each of the three years in the period
                ended December 29, 1996:
             Schedule II - Valuation and Qualifying Accounts                           55


All other  schedules have been omitted  because the required  information is not
applicable,  not required or is included  elsewhere in the financial  statements
and notes thereto.

</TABLE>

                                       50
<PAGE>

(a)(3)   Exhibits:
                                                                                
     3.1       Restated  Certificate of Incorporation.  (Filed as Exhibit 3.1 to
               Rally's  Quarterly  Report  on Form  10-Q for the  quarter  ended
               September 29, 1996, and incorporated herein by reference.)

     3.2       Restated By-Laws. (Filed as Exhibit 3.3 to Form 8 Amendment No. 1
               to Rally's  Annual Report on Form 10-K dated  September 28, 1990,
               and incorporated herein by reference.)

     4.1       Indenture dated as of March 1, 1993, between the Company, certain
               of its  subsidiaries  and PNC Bank  Kentucky,  Inc.,  as Trustee,
               relating to the issuance of $85,000,000  principal  amount of the
               Company's 9 7/8% Senior Notes due 2000.  (Filed as Exhibit 4.1 to
               Rally's  Annual Report on Form 10-K for the year ended January 3,
               1993, and incorporated herein by reference.)

     4.2       Specimen  form of 9 7/8% Senior Note due 2000.  (Filed as Exhibit
               4.2 to  Rally's  Annual  Report on Form  10-K for the year  ended
               January 3, 1993, and incorporated herein by reference.)

     4.3       Form of Common Stock Certificate.  (Filed as Exhibit 4 to Rally's
               Registration  Statement on Form S-1,  dated October 11, 1989, and
               incorporated herein by reference.)

     4.4       Form of Warrant  Agreement between Rally's  Hamburgers,  Inc. and
               American  Stock  Transfer  & Trust  Company,  as  Warrant  Agent,
               including form of Warrant Certificate.  

     4.5       Form of Warrant  Agreement between Rally's  Hamburgers,  Inc. and
               CKE Restaurants, Inc., including form of Warrant Certificate.

     4.6       First Amendment to the Indenture.

     4.7       Other Debt Instruments - Copies of debt instruments for which the
               related debt is less than 10% of the Company's  total assets will
               be furnished to the Commission upon request.

     10.1      Form of Indemnity Agreement between the Company and its directors
               and  officers.  (Filed as Exhibit  10.2 to  Rally's  Registration
               Statement on Form S-1, dated October 11, 1989,  and  incorporated
               herein by reference.)

     *10.2     Amended and Restated  Non-qualified  Stock Option Plan. (Filed as
               Exhibit 10.3 to Amendment No. 1 to Rally's Registration Statement
               on Form S-1, dated October 11, 1989, and  incorporated  herein by
               reference.)

     *10.3     First Amendment to the Amended and Restated  Non-qualified  Stock
               Option Plan, dated as of October 26, 1989. (Filed as Exhibit 10.4
               to Rally's Registration Statement on Form S-1, dated December 29,
               1989, and incorporated herein by reference.)

      10.4     Lease  between  Blue  Ridge  Associates  and  the  Company  dated
               November 17, 1987. (Filed as Exhibit 10.6 to Rally's Registration
               Statement on Form S-1, dated October 11, 1989,  and  incorporated
               herein by reference.)

     *10.5     Rally's,  Inc.  1990 Stock  Option  Plan, as amended.

                                       51
<PAGE>

     *10.6     Rally's Hamburgers,  Inc. 1995 Stock Option Plan for Non-Employee
               Directors.  (Filed  as  Exhibit  A to  Rally's  definitive  Proxy
               Statement,  dated  June  19,  1996  for  the  Annual  Meeting  of
               Stockholders  held on July 10, 1996, and  incorporated  herein by
               reference.)

     10.7      Agreement and Plan of  Reorganization  dated December 12, 1990 by
               and among the  Company,  Snapps  Drive Thru,  Inc. and Jeffrey S.
               Roschman.   (Filed  as  Exhibit  10.24  to  Rally's  Registration
               Statement  on Form S-1,  dated March 15, 1990,  and  incorporated
               herein by reference.)

     10.8      Agreement  dated  December  12,  1990 by and among  the  Company,
               Rally's  of  Ohio,  Inc.,   Snapps   Restaurants,   Inc.,  Snapps
               Restaurants of Springfield,  Inc., Jeffrey S. Roschman and Robert
               J.  Roschman.  (Filed as Exhibit  10.25 to  Rally's  Registration
               Statement  on From S-1,  dated March 15, 1990,  and  incorporated
               herein by reference.)

     10.9      Agreement  for  Purchase  and Sale of Assets  dated June 12, 1992
               among the  Company,  ZDT  Corporation,  Zipps Drive  Thru,  Inc.,
               Robert W.  Gontram,  Metro East Zipps,  Inc. and  Illinois  Zipps
               Properties,  Inc.  (Filed as Exhibit 2.1 to Rally's  Registration
               Statement on Form S-1, dated May 8, 1992, and incorporated herein
               by reference.)

    *10.10     Employment Agreement between the Company and Evan G. Hughes dated
               March 28,  1995.  (Filed as Exhibit  10.13 to  Rally's  Quarterly
               Report on Form 10-Q for the  quarter  ended  April 2,  1995,  and
               incorporated herein by reference.)

    *10.11     Employment  Agreement  between  the  Company  and Donald E. Doyle
               dated March 1, 1996.  (Filed as Exhibit  10.12 to Rally's  Annual
               Report on Form 10-K for the year ended  December  31,  1995,  and
               incorporated herein by reference.)

     *10.12    Supplemental  Employment  Agreement  between  the  Company and
               Donald E. Doyle, dated February 11, 1997.

     10.13     Note purchase  agreement  ($16 million face value bonds)  between
               GIANT  (seller)  and Rally's  (buyer),  dated  January 29,  1996.
               (Filed as Exhibit 10.14 to Rally's Annual Report on Form 10-K for
               the year ended  December 31,  1995,  and  incorporated  herein by
               reference.)

     10.14     Note  purchase  agreement  ($6 million face value bonds)  between
               GIANT  (seller)  and Rally's  (buyer),  dated  January 29,  1996.
               (Filed as Exhibit 10.15 to Rally's Annual Report on Form 10-K for
               the year ended  December 31,  1995,  and  incorporated  herein by
               reference.)

     10.15     Operating Agreement by and between Rally's  Hamburgers,  Inc. and
               Carl  Karcher  Enterprises.   (Filed  as  Exhibit  10.43  to  CKE
               Restaurants, Inc.'s Quarterly Report on FOrm 10-Q for the quarter
               ended May 20, 1996, and incorporated herein by reference.)

     10.16     Consulting Agreement by and between Rally's Hamburgers,  Inc. and
               CKE Restaurants, Inc.
 
     21        Subsidiaries of the Company:
               (a)     Rally's of Ohio, Inc. , an Ohio corporation.
               (b)     Self-Service Drive-Thru, Inc., a Louisiana corporation.
               (c)     Rally's Finance, Inc., a Delaware corporation.
               (d)     Rally's Management, Inc., a Kentucky corporation.
               (e)     ZDT Corporation, a Missouri corporation.
               (f)     RAR, Inc., a Delaware corporation.
               (g)     MAC1, Inc., a Delaware corporation.
               (h)     Hampton Roads Foods, Inc., a Louisiana corporation.

* Compensatory  plan required to be filed as an exhibit  pursuant to Item 14c of
Form 10K.

                                       52
<PAGE>


     23        Consent of Arthur Andersen LLP

     27        Financial Data Schedule (for SEC use only)

(b)       Reports on Form 8-K:

          No  reports on Form 8-K were  filed  during  the last  quarter of year
          1996.

(c)       Exhibits Required by Item 601 of Regulation S-K:

          Described in Item 14(a)(3) of this Annual Report on Form 10-K.

(d)       Financial Statement Schedules:

          Described in Item 14(a)(2) of this Annual Report on Form 10-K.





                                       53
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                            RALLY'S HAMBURGERS, INC.
Date:  INSERT DATE

                             By: /s/ Burt Sugarman
                     --------------------------------------
                                  Burt Sugarman
                              Chairman and Director

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

             Signature                             Title              Date

/s/ Burt Sugarman                      Chairman and Director     March 27, 1997
-------------------------------------
Burt Sugarman

/s/ Terry N. Christensen               Director                  March 27, 1997 
-------------------------------------
Terry N. Christensen

/s/ Willie D. Davis                    Director                  March 27, 1997
-------------------------------------
Willie D. Davis

/s/ William P. Foley II                Director                  March 27, 1997
-------------------------------------
William P. Foley II

/s/ David Gotterer                     Director                  March 27, 1997
-------------------------------------
David Gotterer

/s/ Mark A. Noltemeyer                 Senior Vice President,    March 27, 1997
-------------------------------------   Finance  
Mark A. Noltemeyer                     (Principal Financial 
                                        and Accounting Officer)

/s/ Donald E. Doyle                    President, Chief          March 27, 1997 
-------------------------------------  Executive Officer and Director
Donald E. Doyle


                                       54
<PAGE>



<TABLE>
<CAPTION>
                                Rally's Hamburgers, Inc. and Subsidiaries
                                               Schedule II
                                    Valuation and Qualifying Accounts

                                             (In thousands)

                                                            Additions
                                                    --------------------------
                                       Balance at    Charged to    Charged to
                                       Beginning     Costs and       Other                    Balance at
            Description                 of Year      Expenses      Accounts     Deductions    End of Year
------------------------------------  ------------  ------------  ------------  ------------  ------------
<S>                                   <C>           <C>           <C>           <C>           <C>             
Year Ended January 1, 1995
   Accounts receivable                $        90   $        86   $       -     $       -     $       176
   Royalties receivable                       169           291           -              58           402
                                      ============  ============  ============  ============  ============
                                      $       259   $       377   $       -     $        58   $       578
                                      ============  ============  ============  ============  ============

Year Ended December 31, 1995
   Accounts receivable                $       176   $       376   $        18   $       117   $       453
   Royalties receivable                       402           838         (267)            51           922
   Notes receivable                          -              293           249          -              542
                                      ============  ============  ============  ============  ============
                                      $       578   $     1,507   $       -     $       168   $     1,917
                                      ============  ============  ============  ============  ============

Year Ended December 29, 1996
   Accounts receivable                        453            54             0           206           301
   Royalties receivable                       922           697          (81)           133         1,405
   Notes receivable                           542           200            81          (30)           853
                                      ============  ============  ============  ============  ============
                                      $     1,917   $       951   $         0   $       309   $     2,559
                                      ============  ============  ============  ============  ============

</TABLE>
                                       55
<PAGE>



                                                                                

                    Consent of Independent Public Accountants





As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed Form S-8
Registration  Statements   (Registration  Statement  Nos.  33-33367,   33-39419,
33-39420 and 33-62792).



                                                          ARTHUR ANDERSEN LLP







Louisville, Kentucky
   March 25, 1997

<PAGE>

                                                                     Exhibit 4.4

                            RALLY'S HAMBURGERS, INC.

                                WARRANT AGREEMENT

     THIS WARRANT AGREEMENT (the  "Agreement"),  dated as of September 26, 1996,
is made and entered  into by and between  RALLY'S  HAMBURGERS,  INC., a Delaware
corporation  (the  "Company"),  and American Stock Transfer & Trust Company,  as
warrant agent (the "Warrant Agent")

     WHEREAS,  in  connection  with a rights  offering  (the "Rights  Offering")
pursuant to which the shareholders of the Company  ("Shareholders") may purchase
up to 4,825,805  units (the "Units"),  each Unit  consisting of one share of the
Company's common stock, $.10 par value (the "Common Stock"),  and one redeemable
common  stock  purchase  warrant (the  "Warrant"),  the Company will issue up to
4,825,805  Warrants  evidencing  the right to purchase an aggregate of 4,825,805
shares of Common Stock as constituted on the date hereof; and

     WHEREAS,  the  Company  desires  the  Warrant  Agent  act on  behalf of the
Company,  and the  Warrant  Agent is willing so to act, in  connection  with the
issuance,  registration,  transfer,  exchange,  exercise and  redemption  of the
Warrants;

     NOW, THEREFORE,  in consideration of the promises and the mutual agreements
herein set forth, the parties agree as follows:

     SECTION 1.  Appointment of Warrant Agent.  The Company hereby  appoints the
Warrant Agent to act as agent of the Company for the  Warrants,  and the Warrant
Agent  hereby  accepts  such  appointment  and  agrees  to  perform  the same in
accordance with the terms and conditions set forth in this Agreement.


     SECTION 2.        Warrants and Form of Warrant Certificates.

     (A) Each Warrant shall  entitle the  registered  holder of the  certificate
representing  such Warrant to purchase upon the exercise  thereof,  one share of
Common Stock,  subject to the adjustments  provided for in Section 9 hereof,  at
any time until 5:00 p.m, Eastern time, on September 26, 2000 ("Expiration Date")
unless earlier redeemed pursuant to Section 11 hereof.

     (B) The Warrant  certificates shall be in registered form only. The text of
the  Warrant  certificate  and the form of election to exercise a Warrant on the
reverse side thereof  shall be  substantially  in the form of Exhibit A attached
hereto.  Each  Warrant  certificate  shall be  dated as of the date of  issuance
thereof by the Warrant Agent (whether upon initial  issuance or upon transfer or
exchange)  and  shall be  executed  on behalf of the  Company  by the  manual or
facsimile  signature of its President or a Vice  President,  under its corporate
seal,  affixed or in  facsimile,  and  attested  to by the  manual or  facsimile
signature of its Secretary or an Assistant Secretary. In case any officer of the
Company  who shall have signed any  Warrant  certificate  shall cease to be such
officer of the Company prior to the issuance thereof,  such Warrant  certificate
may  nevertheless  be issued  and  delivered  with the same  force and effect as
though the  person who signed the same had not ceased to be such  officer of the
Company.  Any such Warrant certificate may be signed on behalf of the Company by
persons who, at the actual date of execution  of such Warrant  certificate,  are
the proper officers of the Company, although at the nominal date of such Warrant
certificate any such person shall not have been such officer of the Company.

     SECTION  3.  Exercise  of  Warrants  and  Warrant  Price.  Subject  to  the
provisions  of this  Agreement,  each  registered  holder of one or more Warrant
certificates  shall have the right,  which may be  exercised  as in such Warrant
certificates  expressed,  to purchase  from the Company  (and the Company  shall
issue and sell to such  registered  holder) the number of shares of Common Stock
to which the Warrants  represented by such certificates are at the time entitled
hereunder.

                                       1
<PAGE>

     Each Warrant not exercised by its  expiration  date shall become void,  and
all rights  thereunder  and all rights in respect  thereof under this  Agreement
shall cease on such date.

     A Warrant may be exercised by the surrender of the certificate representing
such  Warrant to the  Company,  at the office of the  Warrant  Agent,  or at the
office of a successor to the Warrant Agent, with the subscription form set forth
on the reverse  thereof duly executed and properly  endorsed with the signatures
properly  guaranteed,  and upon  payment  in full to the  Warrant  Agent for the
account of the Company of the Warrant  Price (as  hereinafter  defined)  for the
number of shares of Common  Stock as to which the  Warrant  is  exercised.  Such
Warrant Price shall be paid in full in cash, or by certified check or bank draft
payable in United States currency to the order of the Warrant Agent.

     The price per share of Common  Stock at which the Warrants may be exercised
(the  "Warrant  Price") shall be $2.25  (adjusted in  accordance  with Section 9
hereof,  taking into account  prior  adjustments).  At any time, or from time to
time the Company may reduce  either or both of the Warrant  Prices or extend the
expiration  date for such period or periods of time as it may determine.  Notice
of any such reduction in the Warrant Prices or extension of the expiration  date
shall be promptly provided to the Warrant Agent.

     Subject  to the  further  provisions  of this  Section  3 and of  Section 6
hereof,  upon  such  surrender  of  Warrant  certificates  and  payment  of  the
applicable  Warrant Price as aforesaid,  the Company shall issue and cause to be
delivered,  with all  reasonable  dispatch to or upon the  written  order of the
registered  holder of such Warrants and in such name or names as such registered
holder may designate, a certificate or certificates for the number of securities
so purchased upon the exercise of such Warrants, together with cash, as provided
in  Section 10 of this  Agreement,  in  respect  of any  fraction  of a share or
security  otherwise  issuable  upon such  surrender.  All shares of Common Stock
issued upon the exercise of a Warrant  shall be validly  issued,  fully paid and
nonassessable and shall be listed on any and all national  securities  exchanges
upon which any other shares of the Common Stock or securities otherwise issuable
are then listed.

     Certificates  representing  such  securities  shall be  deemed to have been
issued and any person so  designated to be named therein shall be deemed to have
become a holder of record of such  securities as of the date of the surrender of
such Warrants and payment of the Warrant Price as aforesaid;  provided, however,
that if, at the date of surrender of such Warrants and payment of the applicable
Warrant  Price,  the  transfer  books for the Common  Stock or other  securities
purchasable upon the exercise of such Warrants shall be closed, the certificates
for the securities in respect of which such Warrants are then exercised shall be
issuable  as of the date on which such books shall next be opened and until such
date the  Company  shall be under no duty to deliver  any  certificate  for such
securities. The rights of purchase represented by each Warrant certificate shall
be exercisable,  at the election of the registered holders thereof, either as an
entirety  or from time to time for part of the  number of  securities  specified
therein and, in the event that any Warrant  certificate  is exercised in respect
of less than all of the  securities  specified  therein at any time prior to the
expiration  date  of the  Warrant  certificate,  a new  Warrant  certificate  or
certificates  will be issued to such registered  holder for the remaining number
of securities specified in the Warrant certificate so surrendered.

     SECTION 4.  Countersignature  and  Registration.  The  Warrant  Agent shall
maintain  books  (the  "Warrant   Register")  for  the   registration   and  the
registration  of transfer of the  Warrants.  The Warrant  certificates  shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as such under this  Agreement) and shall not be
valid for any purpose unless so  countersigned.  Warrant  certificates may be so
countersigned,  however, by the Warrant Agent and delivered by the Warrant Agent
notwithstanding  that the persons  whose manual or facsimile  signatures  appear
thereon as proper  officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.

     Prior to due  presentment  for  registration  of  transfer  of any  Warrant
certificate,  the Company and the Warrant Agent may deem and treat the person in
whose  name  such  Warrant  certificate  shall be  registered  upon the  Warrant
Register  (the  "registered  holder")  as the  absolute  owner  of such  Warrant
certificate  and  of  each  Warrant  

                                       2
<PAGE>

represented thereby  (notwithstanding any notation of ownership or other writing
on the Warrant  certificate made by anyone other than the Company or the Warrant
Agent),  for the purpose of any exercise thereof,  of any distribution or notice
to the holder thereof,  and for all other purposes,  and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary.

     SECTION 5.  Transfer  and  Exchange of  Warrants.  The Warrant  Agent shall
register  the  transfer,  from time to time,  any  outstanding  Warrant upon the
Warrant Register,  upon surrender of the certificate evidencing such Warrant for
transfer,  properly endorsed with signatures properly guaranteed and accompanied
by appropriate  instructions for transfer. Upon any such transfer, a new Warrant
certificate  representing an equal aggregate  number of Warrants shall be issued
to the transferee and the surrendered  Warrant  certificate shall be canceled by
the Warrant Agent.  The Warrant  certificates  so canceled shall be delivered by
the Warrant Agent to the Company from time to time upon request.

     Warrant certificates may be surrendered to the Warrant Agent, together with
a written  request for exchange,  and thereupon the Warrant Agent shall issue in
exchange  therefor  one or more new Warrant  certificates  as  requested  by the
registered  holder of the Warrant  certificate or  certificates  so surrendered,
representing an equal aggregate number of Warrants.

     The  Warrant  Agent shall not be  required  to effect any  registration  of
transfer or exchange which will result in the issuance of a Warrant  certificate
for a fraction of a warrant.

     No  service  charge  shall  be made for any  exchange  or  registration  of
transfer of Warrant certificates.

     The Warrant Agent is hereby  authorized to countersign  and to deliver,  in
accordance  with  the  terms of this  Agreement,  the new  Warrant  certificates
required  to be issued  pursuant  to the  provisions  hereof,  and the  Company,
whenever  required by the  Warrant  Agent,  will  supply the Warrant  Agent with
Warrant certificates duly executed on behalf of the Company for such purpose.

     SECTION 6.  Payment of Taxes.  The Company will pay any  documentary  stamp
taxes  attributable  to the  initial  issuance  of the  shares of  Common  Stock
issuable  upon the exercise of  Warrants;  provided,  however,  that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificates for shares
of Common Stock in a name other than that of the  registered  holder of Warrants
in respect of which such shares are issued, and in such case neither the Company
nor the Warrant Agent shall be required to issue or deliver any  certificate for
shares of Common Stock or any Warrant  certificate  until the person  requesting
the same has paid to the  Company the amount of such tax or has  established  to
the Company's satisfaction that such tax has been paid.

     SECTION  7.  Mutilated  or  Missing  Warrants.  In case any of the  Warrant
certificates shall be mutilated,  lost, stolen or destroyed,  the Company may in
its discretion  issue,  and the Warrant Agent shall  countersign  and deliver in
exchange and  substitution  for and upon  cancellation of the mutilated  Warrant
certificate,  or in lieu of and substitution for the Warrant  certificate  lost,
stolen or destroyed,  a new Warrant certificate  representing an equal aggregate
number of  Warrants,  but only upon  receipt  of  evidence  satisfactory  to the
Company and the Warrant Agent of such loss, theft or destruction of such Warrant
certificate and reasonable indemnity,  if requested,  also satisfactory to them.
Applicants for such substitute Warrant  certificates shall also comply with such
other  reasonable  conditions and pay such reasonable  charges as the Company or
the Warrant Agent may prescribe.

     SECTION 8. Reservation of Common Stock.  There have been reserved,  and the
Company shall at all times keep  reserved,  out of the  authorized  and unissued
shares  of  Common  Stock,  a number of shares  sufficient  to  provide  for the
exercise of the rights of purchase represented by the Warrants then outstanding,
and the transfer agent for the Common Stock and every subsequent  transfer agent
for any shares of the Company's  capital stock issuable upon the exercise of any
of the rights of  purchase  aforesaid  are  hereby  irrevocably  authorized  and
directed at all times to reserve such number of authorized  and unissued  shares
as shall be requisite for such purpose.


                                       3
<PAGE>

     Prior to the  issuance of any shares of Common  Stock upon  exercise of the
Warrants,  the  Company  shall  secure the listing of such shares on any and all
national  securities  exchanges upon which any of the other shares of the Common
Stock are then listed. So long as any unexpired Warrants remain outstanding, the
Company will file such post-effective  amendments to the Registration  Statement
or supplements  to the Prospectus  filed pursuant to the Securities Act of 1933,
as amended (the "Act"), with respect to the Warrants (or such other registration
statements or  post-effective  amendments or supplements) as may be necessary to
permit  trading in the  Warrants  and to permit  the  Company to deliver to each
person  exercising a Warrant a Prospectus  meeting the  requirements  of Section
10(a)(3) of the Act, and otherwise  complying  therewith;  and the Company will,
from  time to  time,  furnish  the  Warrant  Agent  with  such  Prospectuses  in
sufficient  quantity to permit the Warrant Agent to deliver such a Prospectus to
each holder of a Warrant upon the exercise thereof. The Company will keep a copy
of this  Agreement on file with the transfer agent for the Common Stock and with
every  subsequent  transfer agent for any shares of the Company's  capital stock
issuable  upon  the  exercise  of the  rights  of  purchase  represented  by the
Warrants.

     The Warrant Agent is hereby irrevocably authorized to requisition from time
to  time  from  such  transfer  agent  stock  certificates   required  to  honor
outstanding  Warrants.  The Company  will supply such  transfer  agent with duly
executed certificates for such purpose and will itself provide or otherwise make
available  any cash as  provided  in Section 10 of this  Agreement.  All Warrant
certificates  surrendered in the exercise of the rights thereby  evidenced shall
be  canceled by the  Warrant  Agent and shall  thereafter  be  delivered  to the
Company,  and such canceled Warrant  certificates  shall  constitute  sufficient
evidence of the number of shares of Common Stock which have been issued upon the
exercise of such Warrants.  Promptly after the expiration  date of the Warrants,
the Warrant  Agent shall  certify to the  Company the  aggregate  number of such
Warrants  which  expired  unexercised,  and  after  the  expiration  date of the
Warrants,  no shares of Common Stock shall be subject to  reservation in respect
of such Warrants.

     SECTION  9.  Adjustment  of  Warrant  Price and  Number of Shares of Common
Stock.  The number and kind of securities  purchasable  upon the exercise of the
Warrants and the  applicable  Warrant Price shall be subject to adjustment  from
time to time upon the happening of certain events, as follows:

          9.1 Adjustments. The number of shares of Common Stock purchasable upon
     the  exercise of each  Warrant and the  applicable  Warrant  Price shall be
     subject to adjustment as follows:

               (a) In case the Company  shall (i) pay a dividend in Common Stock
          or make a distribution in Common Stock, (ii) subdivide its outstanding
          Common  Stock,  (iii)  combine  its  outstanding  Common  Stock into a
          smaller  number  of  shares  of  Common  Stock,   or  (iv)  issue,  by
          reclassification of its Common Stock, other securities of the Company,
          the number of shares of Common Stock  purchasable  upon  exercise of a
          Warrant immediately prior thereto shall be adjusted so that the holder
          of a Warrant  shall be  entitled  to  receive  the kind and  number of
          shares of Common Stock or other  securities  of the Company which such
          holder  would  have  owned or would  have  been  entitled  to  receive
          immediately  after the happening of any of the events described above,
          had the Warrant been exercised  immediately  prior to the happening of
          such event or any record date with  respect  thereto.  Any  adjustment
          made  pursuant  to  this  subsection  9.1(a)  shall  become  effective
          immediately  after the effective date of such event retroactive to the
          record date, if any, for such event.

               (b) In case the Company shall issue rights, options,  warrants or
          convertible  securities  to all or  substantially  all  holders of its
          Common Stock,  without any charge to such holders,  entitling  them to
          subscribe  for or purchase  Common Stock at a price per share which is
          lower at the record date mentioned  below than the then Current Market
          Price (as  defined  in  Section  10  hereof),  the number of shares of
          Common Stock thereafter  purchasable upon the exercise of each Warrant
          shall be  determined  by  multiplying  the  number of shares of Common
          Stock theretofore purchasable upon exercise of a Warrant by a fraction
          of which the  numerator  shall be the number of shares of Common Stock
          outstanding immediately prior to the issuance of such rights, options,
          warrants  or  convertible  securities  plus the  number of  additional
          shares of Common Stock offered for  subscription  or purchase,  and of
          which the  denominator  
                                       4
<PAGE>

          shall be the number of shares of Common Stock outstanding  immediately
          prior to the issuance of such rights, options, warrants or convertible
          securities  plus the  number of shares  which the  aggregate  offering
          price of the total  number of shares  offered  would  purchase at such
          Current  Market  Price.  Such  adjustment  shall be made whenever such
          rights  options,  warrants or  convertible  securities  are issued and
          shall become effective  immediately and retroactive to the record date
          for the determination of shareholders entitled to receive such rights,
          options, warrants or convertible securities.

               (c) In case the Company shall  distribute to all or substantially
          all holders of its Common  Stock,  evidences  of its  indebtedness  or
          assets  (excluding cash dividends or distributions out of earnings) or
          rights,  options,  warrants or convertible  securities  containing the
          right to  subscribe  for or purchase  Common  Stock  (excluding  those
          referred to in subsection 9.1 (b) above), then in each case the number
          of shares of Common Stock thereafter  purchasable upon the exercise of
          each Warrant shall be determined by  multiplying  the number of shares
          of Common Stock theretofore  purchasable upon exercise of such Warrant
          by a fraction, of which the numerator shall be the then Current Market
          Price on the date of such  distribution,  and of which the denominator
          shall be such  Current  Market  Price on such date minus the then fair
          value (as determined by the Board of Directors,  which  determination,
          if  reasonable  and based  upon the  Board of  Directors'  good  faith
          business  judgment,  shall be binding upon the registered  holders) of
          the portion of the assets or evidences of  indebtedness so distributed
          or of such  subscription  rights,  options,  warrants  or  convertible
          securities  applicable  to one share.  Such  adjustment  shall be made
          whenever any such  distribution is made and shall become  effective on
          the  date of  distribution  retroactive  to the  record  date  for the
          determination of shareholders entitled to receive such distribution.

               (d) No  adjustment  in the  number  of  shares  of  Common  Stock
          purchasable  pursuant to the  Warrants  shall be required  unless such
          adjustment  would  require an  increase  or  decrease  of at least one
          percent in the number of shares of Common Stock then  purchasable upon
          the exercise of the Warrants;  provided,  however that any adjustments
          which by reason of this subsection  9.1(d) are not required to be made
          immediately  shall be carried  forward  and taken into  account in any
          subsequent adjustment.

               (e)  Whenever  the number of shares of Common  Stock  purchasable
          upon the  exercise of a Warrant is adjusted  as herein  provided,  the
          applicable Warrant Price payable upon exercise of the Warrant shall be
          adjusted by multiplying such Warrant Price  immediately  prior to such
          adjustment by the fraction, of which the numerator shall be the number
          of  shares of  Common  Stock  purchasable  upon the  exercise  of such
          Warrant  immediately  prior  to  such  adjustment,  and of  which  the
          denominator  shall  be  the  number  of  shares  of  Common  Stock  so
          purchasable immediately thereafter.

               (f) To the  extent  not  covered  by  subsections  9.1 (b) or (c)
          hereof,  in case  the  Company  shall  sell or issue  Common  Stock or
          rights,  options,  warrants or convertible  securities  containing the
          right to subscribe  for or purchase  shares of Common Stock at a price
          per share (determined,  in the case of such rights, options,  warrants
          or convertible  securities,  by dividing (i) the total amount received
          or receivable by the Company in  consideration of the sale or issuance
          of such rights, options, warrants or convertible securities,  plus the
          total consideration payable to the Company upon exercise or conversion
          thereof,  by (ii) the total  number of shares  covered by such rights,
          options,  warrants  or  convertible  securities)  lower  than the then
          Current  Market  Price in  effect  immediately  prior to such  sale or
          issuance,  then the number of Shares  thereafter  purchasable upon the
          exercise of the Warrants shall be determined by multiplying the number
          of Shares  theretofore  purchasable upon exercise of the Warrants by a
          fraction, of which the numerator shall be the applicable Warrant Price
          and the  denominator  shall be that price  calculated  to the  nearest
          cent) determined by dividing (I) an amount equal to the sum of (A) the
          number of shares of Common Stock outstanding immediately prior to such
          sale or issuance  multiplied by the applicable Warrant Price, plus (B)
          the consideration  received by the Company upon such sale or issuance,
          by (II) the  total  number  of  shares  of  Common  Stock  outstanding
          immediately  after  such sale or  issuance.  For the  purpose  of such
          adjustments,  the Common  Stock which the holders of any such  rights,
          options,  

                                       5
<PAGE>

          warrants or convertible  securities shall be entitled to subscribe for
          or purchase  shall be deemed issued and  outstanding as of the date of
          such sale or issuance  and the  consideration  received by the Company
          therefor  shall be  deemed  to be the  consideration  received  by the
          Company for such rights, options,  warrants or convertible securities,
          plus the  consideration  or premiums  stated in such rights,  options,
          warrants or  convertible  securities  to be paid for the Common  Stock
          covered  thereby In case the Company  shall sell or issue Common Stock
          or rights, options,  warrants or convertible securities containing the
          right to subscribe  for or purchase  Common Stock for a  consideration
          consisting,  in whole or in part,  of property  other than cash or its
          equivalent,  then in determining the "price per share" of Common Stock
          and the  "consideration  received by the  Company"  for purpose of the
          first sentence of this subsection 9.1(f), the Board of Directors shall
          determine the fair value of said property, and such determination,  if
          reasonable and based upon the Board of Directors'  good faith business
          judgment, shall be binding upon the Warrantholder.  In determining the
          "price per  share" of Common  Stock,  any  underwriting  discounts  or
          commissions  shall  not be  deducted  from the price  received  by the
          Company for sales of securities registered under the Act.

               (g)  Whenever  the number of shares of Common  Stock  purchasable
          upon the  exercise  of a Warrant or the  Warrant  Price is adjusted as
          herein provided,  the Company shall cause to be promptly mailed to the
          Warrant Agent and each  registered  holder of a Warrant by first class
          mail,  postage prepaid,  notice of such adjustment or adjustments and,
          with regard to the  Warrant  Agent only,  a  certificate  of the chief
          financial officer of the Company setting forth the number of shares of
          Common  Stock  purchasable  upon the  exercise  of a  Warrant  and the
          applicable  Warrant Price after such adjustment,  a brief statement of
          the facts  requiring such adjustment and the computation by which such
          adjustment was made.

               (h) For the purpose of this  Section 9, the term  "Common  Stock"
          shall mean (i) the class of stock  designated  as the Common  Stock of
          the Company at the date of this Agreement,  or (ii) any other class of
          stock resulting from successive  changes or  reclassification  of such
          Common Stock  consisting  solely of changes in par value,  or from par
          value to no par value, or from no par value to par value. In the event
          that at any time, as a result of an  adjustment  made pursuant to this
          Section 9, a registered  holder shall become  entitled to purchase any
          securities  of  the  Company  other  than  Common  Stock,  (i)  if the
          registered  holder's right to purchase is on any other basis than that
          available to all holders of the Company's  Common  Stock,  the Company
          shall  obtain an opinion of an  investment  banking  firm valuing such
          other  securities  and  (ii)  thereafter  the  number  of  such  other
          securities  so  purchasable   upon  exercise  of  a  Warrant  and  the
          applicable  Warrant  Price  of such  securities  shall be  subject  to
          adjustment  from  time to time in a  manner  and on  terms  as  nearly
          equivalent as practicable to the provisions with respect to the Common
          Stock contained in this Section 9.

               (i) Upon the  expiration  of any  rights,  options,  warrants  or
          conversion  privileges,  if such  shall not have been  exercised,  the
          number of  shares  of Common  Stock  purchasable  upon  exercise  of a
          Warrant and the applicable  Warrant Price, to the extent a Warrant has
          not then been exercised shall, upon such expiration, be readjusted and
          shall  thereafter  be such as they  would  have  been  had  they  been
          originally adjusted (or had the original adjustment not been required,
          as the case may be) on the basis of (A) the fact that the only  shares
          of Common  Stock so issued  were the shares of Common  Stock,  if any,
          actually  issued or sold upon the  exercise of such  rights,  options,
          warrants or conversion  privileges,  and (B) the fact that such shares
          of Common  Stock,  if any,  were issued or sold for the  consideration
          actually   received  by  the  Company  upon  such  exercise  plus  the
          consideration,  if  any,  actually  received  by the  Company  for the
          issuance, sale or grant of all such privileges,  options,  warrants or
          conversion  privileges  whether or not exercised;  provided,  however,
          that no such  readjustment  shall  have the effect of  increasing  the
          applicable  Warrant  Price by an amount in excess of the amount of the
          adjustment initially made in respect of the issuance, sale or grant of
          such rights, options, warrants or conversion privileges.

          9.2 No  Adjustment  for  Dividends.  Except as provided in Section 9.1
     hereof,  no adjustment in respect of any dividends or distributions  out of
     earnings shall be made during the term of a Warrant or upon the exercise of
     a Warrant.

          9.3 No  Adjustment  in Certain  Cases.  No  adjustments  shall be made
     pursuant to Section 9 hereof in connection with the issuance of the Rights,
     the Units (or the shares of Common Stock included  therein) or the Warrants
     (or the underlying  shares of Common Stock).  No adjustments  shall be made
     pursuant  to Section 9 hereof in  connection  with the grant or exercise of
     presently authorized or outstanding options to purchase, or the issuance of
     shares of Common Stock on the exercise  thereof  under the  Company's  1990
     Stock Option Plan and 1995 Stock 

                                       6
<PAGE>

     Option Plan for  Non-Employee  Directors or other options  described in the
     Prospectus,  or  incorporated  by  reference,   dated  July  31,  1996,  as
     supplemented, pursuant to which the Warrants were offered and sold.

          9.4   Preservation   of   Purchase   Rights   Upon   Reclassification,
     Consolidation,  etc. In case of any  consolidation  of the Company  with or
     merger of the Company  into another  corporation  or in case of any sale or
     conveyance to another  corporation  of the property,  assets or business of
     the Company as an entirety or substantially as an entirety,  the Company or
     such successor or purchasing corporation, as the case may be, shall execute
     with the Warrant  Agent an  agreement  that the  registered  holders of the
     Warrants shall have the right thereafter, upon payment of the Warrant Price
     in effect  immediately prior to such action, to purchase,  upon exercise of
     each  Warrant,  the kind and  amount of shares  and  other  securities  and
     property  which it would have owned or have been  entitled to receive after
     the happening of such  consolidation,  merger,  sale or conveyance had each
     Warrant been exercised  immediately prior to such action. In the event of a
     merger  described in Section  368(a)(2)(E) of the Internal  Revenue Code of
     1986, as amended,  in which the Company is the surviving  corporation,  the
     right to purchase shares of Common Stock under the Warrants shall terminate
     on the date of such merger and thereupon the Warrants shall become null and
     void, but only if the controlling corporation shall agree to substitute for
     the  Warrants its warrants  which  entitle the holders  thereof to purchase
     upon their exercise the kind and amount of shares and other  securities and
     property  which they would have owned or been  entitled  to receive had the
     Warrants  been  exercised  immediately  prior  to  such  merger.  Any  such
     agreements   referred  to  in  this   subsection   9.4  shall  provide  for
     adjustments,  which shall be as nearly  equivalent as may be practicable to
     the  adjustments  provided for in Section 9 hereof.  The provisions of this
     subsection 9.4 shall similarly apply to successive consolidations, mergers,
     sales or conveyances.

          9.5 Par Value of Shares of Common  Stock.  Before  taking  any  action
     which would cause an adjustment reducing the applicable Warrant Price below
     the then par  value of the  Common  Stock  issuable  upon  exercise  of the
     Warrants,  the Company  will take any  corporate  action  which may, in the
     opinion of its counsel,  be necessary in order that the Company may validly
     and  legally  issue  fully  paid  and  nonassessable  Common  Stock at such
     adjusted applicable Warrant Price.

          9.6 Independent Public  Accountants.  The Company may retain a firm of
     independent public  accountants of recognized  national standing (which may
     be any such firm regularly employed by the Company) to make any computation
     required under this Section 9.0 and a certificate signed by such firm shall
     be conclusive  evidence of the  correctness of any  computation  made under
     this Section 9.

          9.7 Statement on Warrant Certificates. Irrespective of any adjustments
     in the applicable  Warrant Price or the number of securities  issuable upon
     exercise of Warrants, Warrant certificates theretofore or thereafter issued
     may  continue  to express  the same price and number of  securities  as are
     stated in the similar Warrant  certificates  initially issuable pursuant to
     this  Agreement.  However,  the  Company  may,  at any  time  in  its  sole
     discretion  (which  shall be  conclusive),  make any  change in the form of
     Warrant  certificate  that it may deem appropriate and that does not affect
     the  substance  thereof;  and any Warrant  certificate  thereafter  issued,
     whether upon  registration  of transfer of, or in exchange or  substitution
     for, an outstanding Warrant certificate, may be in the form so changed.

          9.8 No Rights as Shareholder;  Notices to Holders of Warrants.  If, at
     any time prior to the  expiration  of a Warrant and prior to its  exercise,
     any one or more of the following  events shall occur:  (a) any action which
     would require an adjustment  pursuant to subsection  9.1 or 9.4 hereof,  or
     (b) a dissolution,  liquidation or winding up of the Company (other than in
     connection with a consolidation, merger or sale of its property, assets and
     business as an entirety or substantially as an entirety) shall be proposed:

     then  the  Company  shall  give  notice  in  writing  of such  event to the
     registered  holders of the Warrants,  as provided in Section 18 hereof,  at
     least 20 days prior (and pursuant to the  provisions  of subsection  9.1(e)
     with respect to  adjustments  pursuant to subsection  9.1(f) and 9.1(i)) to
     the date fixed as a record date or the date of closing the  transfer  books
     for  the  determination  of  the  shareholders  entitled  to  any  relevant
     dividend,  distribution,  subscription  

                                       7
<PAGE>

     rights or other rights or for the determination of shareholders entitled to
     vote on such proposed  dissolution,  liquidation or winding up. Such notice
     shall  specify such record date or the date of closing the transfer  books,
     as the case may be.  Failure to mail or receive  such  notice or any defect
     therein  shall not affect the  validity  of any action  taken with  respect
     thereto.

     Section 10.  Fractional  Interests.  The  Company  shall not be required to
issue  fractional  shares of Common Stock on the  exercise of a Warrant.  If any
fraction of a share of Common Stock  would,  except for the  provisions  of this
Section  10, be issuable on the  exercise  of a Warrant  (or  specified  portion
thereof),  the Company  shall in lieu thereof pay an amount in cash equal to the
then Current  Market Price  multiplied  by such  fraction.  For purposes of this
Agreement, the term "Current Market Price" shall mean (i) if the Common Stock is
traded in the  over-the-counter  market  and not in the NASDAQ  National  Market
System nor on any  national  securities  exchange,  the average of the per share
closing  bid  prices of the  Common  Stock on the 30  consecutive  trading  days
immediately  preceding  the  date in  question,  as  reported  by  NASDAQ  or an
equivalent  generally accepted reporting service, or (ii) if the Common Stock is
traded  in  the  NASDAQ  National  Market  System  or on a  national  securities
exchange,  the average for the 30 consecutive trading days immediately preceding
the date in question of the daily per share  closing  prices of the Common Stock
in the NASDAQ National Market System or on the principal stock exchange on which
it is listed,  as the case may be. For purposes of clause (i) above,  if trading
in the Common Stock is not reported by NASDAQ, the bid price referred to in said
clause shall be the lowest bid price as reported in the "pink sheets"  published
by National  Quotation  Bureau,  Incorporated.  The closing price referred to in
clause (ii) above shall be the last  reported sale price or, in the case no such
reported  sale takes place on such day, the average of the reported  closing bid
and asked prices,  in either case in the NASDAQ National Market System or on the
national securities exchange on which the Common Stock is then listed.

     SECTION 11.       Redemption.

          (A) The then  outstanding  Warrants may be redeemed,  at the option of
     the Company, at $.01 per share of Common Stock purchasable upon exercise of
     such  Warrants,  at any time after the Daily  Market Price per share of the
     Common Stock for a period of 20 out of 30  consecutive  trading days ending
     not more than 30 days prior to the date of the  notice  given  pursuant  to
     Section 11(B) hereof has equaled or exceeded  $6.00,  as adjusted from time
     to time as provided  in Section 9 hereof,  and prior to  expiration  of the
     Warrants. The Daily Market Price of the Common Stock shall be determined by
     the Company in the manner set forth in Section  11(E) as of the end of each
     trading day (or, if no trading in the Common Stock occurred on such day, as
     of the  end of the  immediately  preceding  trading  day in  which  trading
     occurred)  and  verified to the Warrant  Agent  before the Company may give
     notice of redemption.  All outstanding Warrants must be redeemed if any are
     redeemed,  and any right to exercise an outstanding Warrant shall terminate
     at 5:00 p.m. (New York City Time) on the business day immediately preceding
     the date  fixed for  redemption.  A trading  day shall  mean a day in which
     trading of securities occurred on the New York Stock Exchange.

          (B) The Company may exercise its right to redeem the Warrants  only by
     giving  the notice set forth in the  following  sentence  by the end of the
     thirtieth  (30th)  trading day after the  provisions  of Section 11(A) have
     been satisfied.  In case the Company shall exercise its right to redeem, it
     shall give notice to the Warrant  Agent and the  registered  holders of the
     outstanding  Warrants,  by mailing to such  registered  holders a notice of
     redemption,  first class, postage prepaid, at their addresses as they shall
     appear on the records of the Warrant Agent. Any notice mailed in the manner
     provided  herein  shall be  conclusively  presumed  to have been duly given
     whether or not the registered holder actually receives such notice.

          (C) The notice of redemption  shall specify the redemption  price, the
     date fixed for redemption  (which shall be between the thirtieth (30th) and
     forty-fifth  (45th) day after such notice is  mailed),  the place where the
     Warrant  certificates  shall be delivered and the redemption price shall be
     paid,  and that the right to exercise the Warrant  shall  terminate at 5:00
     p.m.  (New York City Time) on the business day  immediately  preceding  the
     date fixed for redemption.


                                       8
<PAGE>

          (D) Appropriate  adjustment  shall be made to the redemption price and
     to the minimum Daily Market Price  prerequisite  to redemption set forth in
     Section II(A) hereof, in each case on the same basis as provided in Section
     9 hereof with respect to adjustment of the Warrant Price.

          (E) For  purposes of this  Agreement,  the term "Daily  Market  Price"
     shall mean (i) if the Common Stock is traded in the over-the-counter market
     and not in the NASDAQ National Market System nor on any national securities
     exchange,  the closing bid price of the Common  Stock on the trading day in
     question,  as  reported  by  NASDAQ  or an  equivalent  generally  accepted
     reporting  service,  or (ii) if the  Common  Stock is traded in the  NASDAQ
     National Market System or on a national securities exchange,  the daily per
     share  closing  price of the  Common  Stock in the NASDAQ  National  Market
     System  or on the  principal  stock  exchange  on which it is listed on the
     trading  day in  question,  as the case may be. For  purposes of clause (i)
     above,  if trading in the Common Stock is not  reported by NASDAQ,  the bid
     price  referred to in said clause shall be the lowest bid price as reported
     in the "pink sheets" published by National Quotation Bureau,  Incorporated.
     The  closing  price  referred  to in clause  (ii)  above  shall be the last
     reported  sale price or, in case no such  reported sale takes place on such
     day, the average of the reported  closing bid and asked  prices,  in either
     case in the NASDAQ  National  Market  System or on the national  securities
     exchange on which the Common Stock is then listed.

     SECTION 12. Rights as  Warrantholders.  Nothing contained in this Agreement
or in any of the  Warrants  shall be construed  as  conferring  upon the holders
thereof,  as such, any of the rights of shareholders  of the Company,  including
without limitation,  the right to receive dividends or other  distributions,  to
exercise any  preemptive  rights,  to vote or to consent or to receive notice as
shareholders  in respect of the  meetings  of  shareholders  or the  election of
directors or the Company or any other  matter.  Anything  herein to the contrary
notwithstanding,  the Company shall cause copies of all financial statements and
reports,  proxy  statements  and  other  documents  as  it  shall  send  to  its
shareholders  to be sent by the  same  class  mail as sent to its  shareholders,
postage  prepaid,  on the  date of the  mailing  to such  shareholders,  to each
registered  holder of Warrants at his address  appearing on the Warrant Register
as of the record date for the determination of the shareholders entitled to such
documents.

     SECTION 13.  Disposition  of Proceeds on Exercise of Warrants.  The Warrant
Agent shall account promptly to the Company with respect to Warrants  exercised,
and  shall  promptly  pay to the  Company  all  monies  received  by it upon the
exercise of such Warrants, and shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours.

     SECTION 14. Merger or Consolidation or Change of Name of Warrant Agent. Any
corporation  into which the Warrant  Agent may be merged or with which it may be
consolidated,  or any corporation  resulting from any merger or consolidation to
which the Warrant Agent shall be a party, or any  corporation  succeeding to the
corporate  trust  business of the Warrant  Agent,  shall be the successor to the
Warrant  Agent  hereunder  without the  execution  or filing of any paper or any
further  act  on the  part  of any of the  parties  hereto  provided  that  such
corporation would be eligible for appointment as a successor Warrant Agent under
the  provisions  of  Section  16 of this  Agreement.  In case at the  time  such
successor  to the  Warrant  Agent  shall  succeed to the agency  created by this
Agreement and any of the Warrant  certificates shall have been countersigned but
not  delivered,   any  such  successor  to  the  Warrant  Agent  may  adopt  the
countersignature  of  the  original  Warrant  Agent  and  deliver  such  Warrant
certificates  so  countersigned,  and in case at that  time  any of the  Warrant
certificates  shall not have been  countersigned,  any  successor to the Warrant
Agent  may  countersign  such  Warrant  certificates  either  in the name of the
predecessor  Warrant Agent or in the name of the successor Warrant Agent, and in
all such cases the Warrants  represented by such Warrant certificates shall have
the full force provided in the Warrant  certificates and in this Agreement.  Any
such  successor  Warrant Agent shall  promptly give notice of its  succession as
Warrant  Agent to the  Company  and to the  registered  holder  of each  Warrant
certificate.

     In case at any time the name of the  Warrant  Agent shall be changed and at
such time any of the Warrant  certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrant certificates so countersigned, and, in case at that time any
of the Warrant

                                       9
<PAGE>

certificates  shall  not  have  been   countersigned,   the  Warrant  Agent  may
countersign such Warrant certificates either in its prior name or in its changed
name,  and,  in all  such  cases,  the  Warrants  represented  by  such  Warrant
certificates shall have the full force provided in the Warrant  certificates and
in this Agreement.

     SECTION 15. Duties of Warrant  Agent.  The Warrant Agent hereby  undertakes
the duties and  obligations  imposed by this Agreement upon the following  terms
and conditions,  all of which shall bind the Company and the holders of Warrants
by their acceptance thereof.

          (A) The  statements of fact and recitals  contained  herein and in the
     Warrants  shall be taken as statements of the Company and the Warrant Agent
     assumes no  responsibility  for the  correctness  of any of the same except
     such as describe  the Warrant  Agent or action  taken or to be taken by it.
     The  Warrant   Agent  assumes  no   responsibility   with  respect  to  the
     distribution of the Warrants except as herein expressly provided.

          (B) The Warrant Agent shall not be responsible  for any failure of the
     Company to comply with any of the covenants  contained in this Agreement or
     in the Warrants to be complied with by the Company.

          (C)  The  Warrant   Agent  may  consult  at  any  time  with   counsel
     satisfactory  to it (who may be counsel  for the  Company)  and the Warrant
     Agent shall incur no liability or  responsibility  to the Company or to any
     holder of any Warrant in respect of any action  taken,  suffered or omitted
     by it  hereunder  in good faith and in  accordance  with the opinion or the
     advice of such counsel.

          (D) The Warrant  Agent shall incur no liability or  responsibility  to
     the  Company  or to any  holder  of any  Warrant  for any  action  taken in
     reliance on any notice, resolution,  waiver, consent, order, certificate or
     other  paper,  document or  instrument  believed by it to be genuine and to
     have been signed, sent or presented by the proper party or parties.

          (E)  The  Company  agrees  to  pay  to the  Warrant  Agent  reasonable
     compensation  for  all  services  rendered  by  the  Warrant  Agent  in the
     execution  of this  Agreement,  to  reimburse  the  Warrant  Agent  for all
     expenses,  taxes and governmental charges and other charges incurred by the
     Warrant  Agent in the  execution of this  Agreement  and to  indemnify  the
     Warrant  Agent  and  save it  harmless  against  any  and all  liabilities,
     including  judgments,  costs and reasonable counsel fees, for anything done
     or omitted by the Warrant Agent in the execution of this Agreement,  except
     as a result of the Warrant Agent's  negligence,  willful  misconduct or bad
     faith.

          (F) The Warrant  Agent shall be under no  obligation  to institute any
     action,  suit or legal  proceeding or to take any other action on behalf of
     the Company or any registered  holder,  but this provision shall not affect
     the power of the Warrant Agent to take such action as the Warrant Agent may
     consider proper.  All rights of action under this Agreement or under any of
     the Warrants may be enforced by the Warrant Agent without the possession of
     any of the  Warrants  or the  production  thereof  at any  trial  or  other
     proceeding  relative  thereto,  and any  such  action,  suit or  proceeding
     instituted  by the  Warrant  Agent  shall be brought in its name as Warrant
     Agent, and any recovery of judgment shall be for the ratable benefit of all
     the  registered  holders of the  Warrants,  as their  respective  rights or
     interests may appear.

          (G) The  Warrant  Agent and any  shareholder,  director,  officer,  or
     employee of the Warrant  Agent may buy, sell or deal in any of the Warrants
     or other securities of the Company or become pecuniarily  interested in any
     transaction  in which the Company may be  interested,  or contract  with or
     lend money to the Company or otherwise act as fully and freely as though it
     were not Warrant Agent under this Agreement.  Nothing herein shall preclude
     the Warrant Agent from acting in any other  capacity for the Company or for
     any other legal entity.

                                       10
<PAGE>

          (H) The Warrant Agent shall act hereunder solely as agent and not in a
     ministerial  capacity,  and its duties  shall be  determined  solely by the
     provisions hereof. The Warrant Agent shall not be liable for anything which
     it may do or refrain from doing in connection with this  Agreement,  except
     for its own negligence, willful misconduct or bad faith.

          (I) Any request,  direction,  election, order or demand of the Company
     shall be sufficient if evidenced by an instrument signed in the name of the
     Company by its  President,  a Vice  President  or chief  financial  officer
     (unless  other  evidence  in  respect   thereof  is  therein   specifically
     prescribed);  and any resolution of the Board of Directors may be evidenced
     to the Warrant  Agent by a copy thereof  certified  by the  Secretary or an
     Assistant Secretary of the Company.

     SECTION 16.  Change of Warrant  Agent.  The Warrant Agent may resign and be
discharged  from its duties under this  Agreement by giving the Company at least
30 days'  prior  notice in  writing,  and by  mailing  notice in  writing to the
registered holders at their addresses appearing on the Warrant Register, of such
resignation,  specifying a date when such  resignation  shall take  effect.  The
Warrant  Agent may be  removed  by like  notice to the  Warrant  Agent  from the
Company and by like mailing of notice to the registered holders of the Warrants.
If the  Warrant  Agent  shall  resign or be  removed or shall  otherwise  become
incapable of acting, the Company shall appoint a successor to the Warrant Agent.
If the  Company  shall fail to make such  appointment  within 30 days after such
removal  or  after  it has been  notified  in  writing  of such  resignation  or
incapacity by the resigning or incapacitated  Warrant Agent or by the registered
holder of a Warrant (who shall, with such notice, submit his Warrant certificate
for inspection by the Company),  then the  registered  holder of any Warrant may
apply to any court of competent  jurisdiction for the appointment of a successor
to the Warrant  Agent.  Any successor  Warrant Agent,  whether  appointed by the
Company or by such a court,  shall be  registered  and  otherwise  authorized to
serve as a transfer agent  pursuant to the  Securities  Exchange Act of 1934, as
amended.  If at any  time the  Warrant  Agent  shall  cease  to be  eligible  in
accordance  with the provisions of this Section 16, it shall resign  immediately
in the manner and with the effect specified in this Section 16. After acceptance
in writing of the appointment,  the successor Warrant Agent shall be vested with
the  same  powers,  rights,  duties  and  responsibilities  as  if it  had  been
originally  named as Warrant Agent without  further act or deed;  but the former
Warrant  Agent shall  deliver and transfer to the  successor  Warrant  Agent any
property at the time held by it  hereunder,  and execute and deliver any further
assurance,  conveyance,  act or deed necessary for the purpose.  Upon request of
any successor  Warrant Agent, the Company shall make,  execute,  acknowledge and
deliver  any and all  instruments  in  writing  for more  fully and  effectually
vesting in and  confirming  to such  successor  Warrant  Agent all such  powers,
rights, duties and responsibilities. Failure to file or mail any notice provided
in this  Section  16,  however,  or any  defect  therein,  shall not  affect the
legality or validity of the  resignation  or removal of the Warrant Agent or the
appointment of the successor Warrant Agent, as the case may be.

     SECTION 17. Identity of Transfer  Agent.  Forthwith upon the appointment of
any transfer agent for the Common Stock or of any subsequent  transfer agent for
shares of the  Common  Stock or other  shares  of the  Company's  capital  stock
issuable  upon  the  exercise  of the  rights  of  purchase  represented  by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such transfer agent.

     SECTION  18.  Notices.  All  notices,  requests  and  other  communications
pursuant to this Agreement shall be in writing and shall be  sufficiently  given
or made when delivered or three business days after deposit in the U.S. mail, by
first class mail, postage prepaid, addressed as follows:

          (a) if to the Company,  to (until another  address is filed in writing
     by the Company with the Warrant Agent):

                         Rally's Hamburgers, Inc.
                         10002 Shelbyville Road, Suite 150
                         Louisville, Kentucky 40223
                         Attention: President


                                       11
<PAGE>

          (b) if to the Warrant  Agent,  to (until  another  address is filed in
     writing by the Warrant Agent with the Company):

                         American Stock Transfer & Trust Company
                         40 Wall Street, 46th Floor
                         New York, New York 10005
                         Attention: George Karfunkel

          (c) if to the registered  holder of a Warrant,  to the address of such
     holder as shown in the Warrant Register.

     SECTION 19.  Supplements and Amendments.  The Company and the Warrant Agent
may from time to time supplement or amend this Agreement without the approval of
any  holders  of  Warrants  in order  to cure any  ambiguity  or to  correct  or
supplement any provision contained herein which may be defective or inconsistent
with any other provision  herein,  or to make any other  provisions in regard to
matters or questions  arising  hereunder which the Company and the Warrant Agent
may deem  necessary or desirable  and which shall not be  inconsistent  with the
provisions of the Warrants, or which shall not adversely affect the interests of
the holders of Warrants  (including  reducing the Warrant Price or extending the
redemption or expiration date).

     SECTION 20. Successors.  All the covenants and provisions of this Agreement
by or for the  benefit of the  Company or the  Warrant  Agent or the  registered
holders of the Warrants shall bind and inure to the benefit of their  respective
successors and assigns hereunder.

     SECTION 21.  Governing Law. This Agreement shall be deemed to be a contract
made  under  the laws of the State of  Delaware  and for all  purposes  shall be
construed in accordance with the laws of said State.

     SECTION 22. Benefits of this Agreement.  Nothing in this Agreement shall be
construed  to give to any  person or  corporation  other than the  Company,  the
Warrant Agent and the registered  holders of the Warrants any legal or equitable
right,  remedy or claim under this  Agreement.  This Agreement  shall be for the
sole and exclusive benefit of the Company,  the Warrant Agent and the registered
holders of the Warrants.

     SECTION 23.  Counterparts.  This Agreement may be executed in  counterparts
and  each  of such  counterparts  shall  for all  purposes  be  deemed  to be an
original,  and all such counterparts  shall together  constitute but one and the
same instrument.

     SECTION 24. Descriptive  Headings.  The descriptive headings of the several
Sections of this  Agreement  are  inserted  for  convenience  only and shall not
control or affect the meaning or construction of any of the provisions hereof.

     IN WITNESS  WHEREOF,  the parties  have caused  this  Agreement  to be duly
executed, as of the day and year first above written.

                                   RALLY'S HAMBURGERS, INC.


                                   By:  /s/ Michael E. Foss
                                        -----------------------------

                                   Its:   Senior V.P. and C.F.O.
                                        -----------------------------

                                   AMERICAN STOCK TRANSFER & TRUST COMPANY
 

                                   By:  /s/  Herbert J. Lemmer
                                        -----------------------------

                                   Its:   Vice President
                                        -----------------------------

                                       12
<PAGE>

                                                                      EXHIBIT A

WARRANT CERTIFICATE NO. 1                                              WARRANTS

                                                               CUSIP 75 1203126

                   WARRANT TO PURCHASE SHARES OF COMMON STOCK

                    VOID AFTER 5:00 P.M., NEW YORK CITY TIME,
                              ON SEPTEMBER 26, 2000

                            RALLY'S HAMBURGERS, INC.

              INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

     This        certifies        that,        for        value        received,
__________________________________________,  the  registered  holder  hereof  or
assigns (the "Holder"), is entitled to purchase from Rally's Hamburgers, Inc., a
Delaware  corporation  (the  "Company"),  at any time before 5:00 p.m., New York
City Time, on September 26, 2000, at the purchase  price per share of $2.25 (the
"Warrant Price"),  the number of shares of Common Stock of the Company set forth
above (the  "Shares").  The number of Shares  purchasable  upon exercise of each
Warrant  evidenced  hereby and the  Warrant  Price per Share shall be subject to
adjustment from time to time as set forth in the Warrant  Agreement  referred to
below.  This Warrant is subject to redemption by the Company,  at $.01 per Share
of Common Stock purchasable upon exercise hereof, upon not less than 30 nor more
than 45 days'  notice,  at any time  after the Daily  Market  Price  (determined
pursuant  to the  Warrant  Agreement)  per Share of Common  Stock has equaled or
exceeded  $6.00 for a period of at least 20 out of 30  consecutive  trading days
during the 30 trading  days prior to the date of the notice of  redemption,  and
prior to expiration of the Warrants.  The Warrant redemption price and the Daily
Market Price referred to above shall be subject to adjustment  from time to time
as set forth in the Warrant Agreement.

     The  Warrants  evidenced  hereby  may be  exercised  in whole or in part by
presentation of this Warrant  certificate with the Purchase Form attached hereto
duly executed (with a signature  guarantee as provided thereon) and simultaneous
payment of the Warrant Price (subject to adjustment) at the principal  office in
American Stock Transfer & Trust Company,  40 Wall Street,  46th Floor, New York,
New York 10005 (the "Warrant Agent"). Payment of such price shall be made at the
option of the Holder in cash or by certified  check or bank draft payable to the
Warrant Agent, all as provided in the Warrant Agreement.

     The Warrants evidenced hereby are part of a duly authorized issue of Common
Stock Purchase  Warrants with rights to purchase an aggregate of up to 4,825,805
Shares of Common  Stock of the  Company and are issued  under and in  accordance
with a Warrant Agreement dated as of September 26, 1996, between the Company and
the Warrant Agent and are subject to the terms and provisions  contained in such
Warrant  Agreement,  to all of which the Holder of this Warrant  certificate  by
acceptance hereof consents.  A copy of the Warrant Agreement may be obtained for
inspection by the Holder hereof upon written request to the Warrant Agent.

     Upon any partial exercise of the Warrants evidenced hereby,  there shall be
countersigned  and issued to the Holder a new Warrant  certificate in respect of
the Shares as to which the Warrants  evidenced  hereby have not been  exercised.
This Warrant  certificate may be exchanged at the office of the Warrant Agent by
surrender  of this  Warrant  certificate  properly  endorsed  (with a  signature
guarantee)  either  separately or in combination with one or more other Warrants
or one or more new Warrants to purchase the same  aggregate  number of Shares as
were evidenced by the Warrant or Warrants  exchanged.  No fractional Shares will
be issued upon the  exercise of rights to  purchase  hereunder,  but the Company
shall  pay the cash  value of any  fraction  upon  the  exercise  of one or more
Warrants.  The Warrants  evidenced  hereby are transferable at the office of the
Warrant  Agent in the manner and  subject  to the  limitations  set forth in the
Warrant Agreement.


                                       13
<PAGE>

     The Holder hereof may be treated by the Company,  the Warrant Agent and all
other persons dealing with this Warrant certificate as the absolute owner hereof
for all purposes and as the person  entitled to exercise the rights  represented
hereby, any notice to the contrary  notwithstanding,  and until such transfer is
entered on such books,  the Company may treat the Holder hereof as the owner for
all purposes.

     This Warrant  certificate  does not entitle the Holder hereof to any of the
rights of a stockholder of the Company.

     This Warrant  certificate  shall not be valid or obligatory for any purpose
until it has been countersigned by the Warrant Agent.

Dated: ___________, 1996                     RALLY'S HAMBURGERS, INC.


                                             By:  /s/
                                                  -----------------------------
 
ATTEST:

-------------------------

-------------------------

Countersigned:

-------------------------

Warrant Agent

By:  /s/
     --------------------
Authorized Signatory

                                       14
<PAGE>


                      [Reverse side of Warrant Certificate]

                            RALLY'S HAMBURGERS, INC.

                                  PURCHASE FORM

                                Mailing Address:
     Rally's Hamburger, Inc.
     10002 Shelbyville Road
     Suite 150
     Louisville, Kentucky  40223

     The undersigned hereby irrevocably elects to exercise the right of purchase
represented  by the within  Warrant  for and to purchase  thereunder,  _________
Shares of Common Stock provided for therein,  and requests that certificates for
such Shares be issued in the name of:
                                                                               
                                                                               
(Please Print or Type Name, Address and Social Security number)

and if said number of Shares shall not be all the Shares  purchasable  hereunder
that a new Warrant  certificate for the balance of the Shares  purchasable under
the within  Warrant  certificate  be registered  in the name of the  undersigned
Holder or his Assignee as below  indicated and  delivered to the address  stated
below.

Dated:________________________

Name of Holder or Assignee:

------------------------------
       (Please Print)

Address:
                                                                                
                                                                               

Signature:
          ------------------------------------------ 
Note: The above  signature must  correspond with the name as it appears upon the
face of the within Warrant  certificate in every particular,  without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:

----------------------------------------------------
(Signature  must be guaranteed  by a bank or trust  company  having an office or
correspondent  in  the  United  States  or  by a  member  firm  of a  registered
securities exchange or the National Association of Securities Dealers, Inc.)

                                       15
<PAGE>

                                   ASSIGNMENT
 
                 (To be signed only upon assignment of Warrant)

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers the
right to purchase ________ Shares represented by the within Warrant  Certificate
unto, and requests that a Certificate for such warrant be issued in the name of


------------------------------------------------------------
(Name and Address of Assignee Must Be Printed or Typewritten)

------------------------------------------------------------

hereby irrevocably constituting and appointing  ____________________ as Attorney
to  transfer  said  Warrants  on the books of the  Company,  with full  power of
substitution  in the premises  and, if said number of Shares shall not be all of
the Shares purchasable under the within Warrant certificate,  that a new Warrant
certificate for the balance of such Shares  purchasable under the within Warrant
certificate be registered in the name of the undersigned Holder and delivered to
such Holder's address as then set forth on the Company's books.

Dated:____________________________


               --------------------------------------------
               Signature of Registered Holder

               Note: The signature on this  assignment  must correspond with the
               name  as  it  appears  upon  the  face  of  the  within   Warrant
               certificate   in  every   particular,   without   alteration   or
               enlargement or any change whatever.

Signature Guaranteed:

-----------------------------------------
(Signature  must be guaranteed  by a bank or trust  company  having an office or
correspondent  in  the  United  States  or  by a  member  firm  of a  registered
securities exchange or the National Association of Securities Dealers, Inc.)

                                       16
<PAGE>

                                                                     Exhibit 4.5
                            RALLY'S HAMBURGERS, INC.

                                WARRANT AGREEMENT

     THIS WARRANT AGREEMENT (the "Agreement"), dated as of December 20, 1996, is
made and  entered  into by and  between  RALLY'S  HAMBURGERS,  INC.,  a Delaware
corporation  (the  "Company"),  FIDELITY  NATIONAL  FINANCIAL,  INC., a Delaware
corporation  ("Fidelity")  and CKE  RESTAURANTS,  INC.,  a Delaware  corporation
("CKE").

     WHEREAS,  the Company has requested that Fidelity and CKE provide  services
to the Company, and Fidelity and CKE are willing to do so;

     WHEREAS, in connection with the foregoing,  the Company desires to issue to
CKE common stock  purchase  warrants  evidencing  the right to purchase  750,000
shares of the Company's  common stock,  $.10 par value (the "Common Stock") (the
"CKE  Warrants"),  and to issue  to  Fidelity  common  stock  purchase  warrants
evidencing  the right to purchase  750,000 shares of Common Stock (the "Fidelity
Warrants") (the CKE Warrants and the Fidelity Warrants are collectively referred
to herein as the "Warrants");

     NOW, THEREFORE,  in consideration of the promises and the mutual agreements
herein set forth, the parties agree as follows:

     SECTION 1. Grant of  Warrants.  The  Company  hereby  grants to CKE the CKE
Warrants and hereby grants to Fidelity the Fidelity Warrants.

     SECTION 2.        Warrants and Form of Warrant Certificates.

          (A)  Each  Warrant  shall  entitle  the   registered   holder  of  the
     certificate  representing  such  Warrant  to  purchase  upon  the  exercise
     thereof, one share of Common Stock, subject to the adjustments provided for
     in Section 10 hereof, commencing December 20,  1997 until 5:00 p.m, Eastern
     time, on December 20, 1999 ("Expiration Date").

          (B) The Warrant  certificates  shall be in registered  form only.  The
     text of the  Warrant  certificate  and the form of  election  to exercise a
     Warrant on the reverse side thereof shall be  substantially  in the form of
     Exhibit A attached hereto.  Each Warrant  certificate  shall be dated as of
     the date of issuance  thereof by the Company (whether upon initial issuance
     or upon  transfer  or  exchange)  and  shall be  executed  on behalf of the
     Company by the manual or  facsimile  signature  of its  President or a Vice
     President,  under its corporate seal, affixed or in facsimile, and attested
     to by the manual or facsimile  signature  of its  Secretary or an Assistant
     Secretary.  In case any  officer of the  Company  who shall have signed any
     Warrant  certificate shall cease to be such officer of the Company prior to
     the issuance thereof,  such Warrant  certificate may nevertheless be issued
     and  delivered  with the same  force and  effect as though  the  person who
     signed the same had not ceased to be such officer of the Company.  Any such
     Warrant  certificate may be signed on behalf of the Company by persons who,
     at the actual date of execution of such Warrant certificate, are the proper
     officers  of the  Company,  although at the  nominal  date of such  Warrant
     certificate  any such  person  shall  not have  been  such  officer  of the
     Company.

     SECTION  3.  Exercise  of  Warrants  and  Warrant  Price.  Subject  to  the
provisions  of this  Agreement,  each  registered  holder of one or more Warrant
certificates  shall have the right,  which may be  exercised  as in such Warrant
certificates  expressed,  to purchase  from the Company  (and the Company  shall
issue and sell to such  registered  holder) the number of shares of Common Stock
to which the Warrants  represented by such certificates are at the time entitled
hereunder.

     Each Warrant not exercised by its  expiration  date shall become void,  and
all rights  thereunder  and all rights in respect  thereof under this  Agreement
shall cease on such date.
 
     A Warrant may be exercised by the surrender of the certificate representing
such Warrant to the Company, with the subscription form set forth on the reverse
thereof  duly  executed  and  properly  endorsed  with the  signatures  properly
guaranteed,  and upon  payment in full to the Company of the  Warrant  Price (as
hereinafter  defined)  for the number of shares of Common  Stock as to which the
Warrant is  exercised.  Such  Warrant  Price shall be paid in full in cash or by
certified  check or bank draft payable in United States currency to the order of
the Company.


                                       1
<PAGE>

     The price per share of Common  Stock at which the Warrants may be exercised
(the "Warrant  Price") shall be $4.375  (adjusted in accordance  with Section 10
hereof,  taking into account  prior  adjustments).  At any time, or from time to
time the Company may reduce the Warrant Price and/or extend the expiration  date
for such  period  or  periods  of time as it may  determine.  Notice of any such
reduction  in the Warrant  Price or extension  of the  expiration  date shall be
promptly provided to the registered holder of the Warrants so affected.

     Subject  to the  further  provisions  of this  Section  3 and of  Section 6
hereof,  upon  such  surrender  of  Warrant  certificates  and  payment  of  the
applicable  Warrant Price as aforesaid,  the Company shall issue and cause to be
delivered,  with all  reasonable  dispatch to or upon the  written  order of the
registered  holder of such Warrants and in such name or names as such registered
holder may designate, a certificate or certificates for the number of securities
so purchased upon the exercise of such Warrants, together with cash, as provided
in  Section 11 of this  Agreement,  in  respect  of any  fraction  of a share or
security  otherwise  issuable  upon such  surrender.  All shares of Common Stock
issued upon the exercise of a Warrant  shall be validly  issued,  fully paid and
nonassessable.

     Certificates  representing  such  securities  shall be  deemed to have been
issued and any person so  designated to be named therein shall be deemed to have
become a holder of record of such  securities as of the date of the surrender of
such Warrants and payment of the Warrant Price as aforesaid;  provided, however,
that if, at the date of surrender of such Warrants and payment of the applicable
Warrant  Price,  the  transfer  books for the Common  Stock or other  securities
purchasable upon the exercise of such Warrants shall be closed, the certificates
for the securities in respect of which such Warrants are then exercised shall be
issuable  as of the date on which such books shall next be opened and until such
date the  Company  shall be under no duty to deliver  any  certificate  for such
securities. The rights of purchase represented by each Warrant certificate shall
be exercisable,  at the election of the registered holders thereof, either as an
entirety  or from time to time for part of the  number of  securities  specified
therein and, in the event that any Warrant  certificate  is exercised in respect
of less than all of the  securities  specified  therein at any time prior to the
expiration  date  of the  Warrant  certificate,  a new  Warrant  certificate  or
certificates  will be issued to such registered  holder for the remaining number
of securities specified in the Warrant certificate so surrendered.

     SECTION 4.  Registration.  The Company shall  maintain  books (the "Warrant
Register")  for  the  registration  and  the  registration  of  transfer  of the
Warrants.  Prior to due presentment for  registration of transfer of any Warrant
certificate,  the  Company  may deem and  treat the  person  in whose  name such
Warrant   certificate  shall  be  registered  upon  the  Warrant  Register  (the
"registered  holder") as the absolute owner of such Warrant  certificate  and of
each Warrant represented thereby  (notwithstanding  any notation of ownership or
other writing on the Warrant certificate made by anyone other than the Company),
for the purpose of any exercise  thereof,  of any  distribution or notice to the
holder  thereof,  and for all  other  purposes,  and the  Company  shall  not be
affected by any notice to the contrary.

     SECTION 5. Transfer and Exchange of Warrants.  Subject to the provisions of
Section 9,  the Company shall  register the transfer,  from time to time, of any
outstanding Warrant upon the Warrant Register, upon surrender of the certificate
evidencing such Warrant for transfer, properly endorsed with signatures properly
guaranteed and accompanied by appropriate  instructions  for transfer.  Upon any
such transfer, a new Warrant certificate  representing an equal aggregate number
of  Warrants  shall be  issued to the  transferee  and the  surrendered  Warrant
certificate shall be canceled by the Company.

     Warrant  certificates  may be surrendered  to the Company,  together with a
written request for exchange,  and thereupon the Company shall issue in exchange
therefor one or more new Warrant  certificates  as  requested by the  registered
holder of the Warrant  certificate or certificates so surrendered,  representing
an equal aggregate number of Warrants.

     The Company shall not be required to effect any registration of transfer or
exchange  which  will  result in the  issuance  of a Warrant  certificate  for a
fraction of a Warrant.

     No  service  charge  shall  be made for any  exchange  or  registration  of
transfer of Warrant certificates.

                                       2
<PAGE>

     SECTION 6.  Payment of Taxes.  The Company will pay any  documentary  stamp
taxes  attributable  to the  initial  issuance  of the  shares of  Common  Stock
issuable  upon the exercise of  Warrants;  provided,  however,  that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificates for shares
of Common Stock in a name other than that of the  registered  holder of Warrants
in respect of which such shares are issued,  and in such case the Company  shall
not be required to issue or deliver any  certificate  for shares of Common Stock
or any Warrant  certificate until the person requesting the same has paid to the
Company the amount of such tax or has established to the Company's  satisfaction
that such tax has been paid.

     SECTION  7.  Mutilated  or  Missing  Warrants.  In case any of the  Warrant
certificates shall be mutilated,  lost, stolen or destroyed,  the Company may in
its discretion  issue, in lieu of and substitution  for the Warrant  certificate
lost,  stolen or  destroyed,  a new Warrant  certificate  representing  an equal
aggregate number of Warrants,  but only upon receipt of evidence satisfactory to
the Company of such loss,  theft or destruction of such Warrant  certificate and
reasonable  indemnity,  if requested,  also satisfactory to them. Applicants for
such  substitute  Warrant   certificates  shall  also  comply  with  such  other
reasonable  conditions  and pay  such  reasonable  charges  as the  Company  may
prescribe.
 
     SECTION 8. Reservation of Common Stock.  There have been reserved,  and the
Company shall at all times keep  reserved,  out of the  authorized  and unissued
shares  of  Common  Stock,  a number of shares  sufficient  to  provide  for the
exercise of the rights of purchase represented by the Warrants then outstanding,
and the transfer agent for the Common Stock and every subsequent  transfer agent
for any shares of the Company's  capital stock issuable upon the exercise of any
of the rights of  purchase  aforesaid  are  hereby  irrevocably  authorized  and
directed at all times to reserve such number of authorized  and unissued  shares
as shall be requisite for such purpose.

     All Warrant certificates  surrendered in the exercise of the rights thereby
evidenced  shall  be  canceled  by  the  Company,   and  such  canceled  Warrant
certificates  shall  constitute  sufficient  evidence of the number of shares of
Common  Stock which have been issued upon the exercise of such  Warrants.  After
the expiration date of the Warrants,  no shares of Common Stock shall be subject
to reservation in respect of such Warrants.

     SECTION  9.   Representations   and   Warrants  of  CKE  and  Fidelity  and
Restrictions on Transfer

          9.1 Representations and Warranties by CKE and Fidelity  (collectively,
     the "Warrantholders").  CKE and Fidelity severally represent and warrant to
     the Company as follows:

               (a) The Warrants are being acquired for such  Warrantholder's own
          account,  for  investment  and not with a view to,  or for  resale  in
          connection  with, any  distribution or public offering  thereof within
          the meaning of the Securities Act of 1933, as amended (the "Securities
          Act").
 
               (b) Such Warrantholder  understands that neither the Warrants nor
          the  Common  Stock  underlying  them  have been  registered  under the
          Securities  Act by reason of their  issuance in a  transaction  exempt
          from the  registration  and prospectus  delivery  requirements  of the
          Securities Act pursuant to Section 4(2) thereof,  that the Company has
          no present  intention of registering  the Warrants or the Common Stock
          underlying them (collectively, the "Securities"),  that the Securities
          must  be  held  by  the  Warrantholder  indefinitely,   and  that  the
          Warrantholder must therefore bear the economic risk of such investment
          indefinitely,  unless a subsequent  disposition  thereof is registered
          under the Securities Act or is exempt from registration.

               (c) Such  Warrantholder is an "Accredited  Investor" as that term
          is  defined  in  Rule  501  of  Regulation  D  promulgated  under  the
          Securities Act. Such  Warrantholder  is able to bear the economic risk
          of the  purchase  of the  Securities  pursuant  to the  terms  of this
          Agreement, including a complete loss of the Warrantholders' investment
          in the Securities.

               (d) Such Warrantholder has the full right, power and authority to
          enter into and perform its obligations under this Agreement,  and this
          Agreement  constitutes  the  valid  and  binding  obligations  of  the
          Warrantholder enforceable in accordance with their terms.

                                       3
<PAGE>

               (e) No consent,  approval  or  authorization  of or  designation,
          declaration or filing with any  governmental  authority on the part of
          such  Warrantholder is required in connection with the valid execution
          and delivery of this Agreement.

          9.2 Restrictions on Transfer.

               (a)  Each  certificate   representing  the  Securities  shall  be
          endorsed with substantially the following legend:

               THE  SECURITIES  EVIDENCED  BY THIS  CERTIFICATE  HAVE  NOT  BEEN
          REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  AND MAY NOT
          BE SOLD,  TRANSFERRED,  ASSIGNED OR  HYPOTHECATED  UNLESS  THERE IS AN
          EFFECTIVE   REGISTRATION   STATEMENT  UNDER  SUCH  ACT  COVERING  SUCH
          SECURITIES,   THE  TRANSFER  IS  MADE  IN  COMPLIANCE  WITH  RULE  144
          PROMULGATED  UNDER  SUCH ACT OR THE  COMPANY  RECEIVES  AN  OPINION OF
          COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY  SATISFACTORY TO
          THE  COMPANY,   STATING  THAT  SUCH  SALE,  TRANSFER,   ASSIGNMENT  OR
          HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS  DELIVERY
          REQUIREMENTS OF SUCH ACT.

The  Company  need not  register  a  transfer  of any  Securities,  and may also
instruct  its transfer  agent not to register  the  transfer of the  Securities,
unless the conditions specified in the foregoing legend are satisfied.

               (b) Any legend  endorsed on a certificate  pursuant to subsection
          9.2(a) and any stop  transfer  instructions  shall be removed  and the
          Company  shall issue a  certificate  without such legend to the holder
          thereof if such Securities are registered under the Securities Act and
          a prospectus  meeting the requirements of Section 10 of the Securities
          Act is  available,  if such legend may be properly  removed  under the
          terms of Rule 144  promulgated  under  the  Securities  Act or if such
          holder  provides  the  Company  with an opinion  of  counsel  for such
          holder,  reasonably  satisfactory to legal counsel for the Company, to
          the effect that a sale,  transfer or assignment of such Securities may
          be made without registration.

     SECTION  10.  Adjustment  of  Warrant  Price and Number of Shares of Common
Stock.  The number and kind of securities  purchasable  upon the exercise of the
Warrants and the  applicable  Warrant Price shall be subject to adjustment  from
time to time upon the happening of certain events, as follows:
 
          10.1  Adjustments.  The number of shares of Common  Stock  purchasable
     upon the exercise of each Warrant and the applicable Warrant Price shall be
     subject to adjustment as follows:

               (a) In case the Company  shall (i) pay a dividend in Common Stock
          or make a distribution in Common Stock, (ii) subdivide its outstanding
          Common  Stock,  (iii)  combine  its  outstanding  Common  Stock into a
          smaller  number  of  shares  of  Common  Stock,   or  (iv)  issue,  by
          reclassification of its Common Stock, other securities of the Company,
          the number of shares of Common Stock  purchasable  upon  exercise of a
          Warrant immediately prior thereto shall be adjusted so that the holder
          of a Warrant  shall be  entitled  to  receive  the kind and  number of
          shares of Common Stock or other  securities  of the Company which such
          holder  would  have  owned or would  have  been  entitled  to  receive
          immediately  after the happening of any of the events described above,
          had the Warrant been exercised  immediately  prior to the happening of
          such event or any record date with  respect  thereto.  Any  adjustment
          made  pursuant  to this  subsection  10.1(a)  shall  become  effective
          immediately  after the effective date of such event retroactive to the
          record date, if any, for such event.

               (b) In case the Company shall issue rights, options,  warrants or
          convertible  securities  to all or  substantially  all  holders of its
          Common Stock,  without any charge to such holders,  entitling  them to
          subscribe  for or purchase  Common Stock at a price per share which is
          lower at the record date mentioned  below than the then Current Market
          Price (as  defined  in  Section  11  hereof),  the number of shares of
          Common Stock thereafter  purchasable upon the exercise of each Warrant
          shall be  determined  by  multiplying  the  number of shares of Common
          Stock theretofore purchasable upon exercise of a Warrant by a fraction
          of which the  numerator  shall be the number of shares of Common Stock
          outstanding immediately prior to the issuance of such rights, options,
          warrants  or  convertible  securities  plus the  number of  additional
          shares of Common Stock offered for  subscription  or purchase,  and of
          which the denominator shall be the number of shares
 
                                      4
<PAGE>
          of Common Stock outstanding  immediately prior to the issuance of such
          rights, options, warrants or convertible securities plus the number of
          shares  which the  aggregate  offering  price of the  total  number of
          shares  offered  would  purchase at such Current  Market  Price.  Such
          adjustment  shall be made  whenever such rights  options,  warrants or
          convertible   securities   are  issued  and  shall  become   effective
          immediately and  retroactive to the record date for the  determination
          of shareholders entitled to receive such rights, options,  warrants or
          convertible securities.

               (c) In case the Company shall  distribute to all or substantially
          all holders of its Common  Stock,  evidences  of its  indebtedness  or
          assets  (excluding cash dividends or distributions out of earnings) or
          rights,  options,  warrants or convertible  securities  containing the
          right to  subscribe  for or purchase  Common  Stock  (excluding  those
          referred  to in  subsection  10.1 (b)  above),  then in each  case the
          number  of  shares of Common  Stock  thereafter  purchasable  upon the
          exercise of each Warrant shall be determined by multiplying the number
          of shares of Common Stock  theretofore  purchasable  upon  exercise of
          such Warrant by a fraction,  of which the numerator  shall be the then
          Current  Market Price on the date of such  distribution,  and of which
          the denominator  shall be such Current Market Price on such date minus
          the then fair value (as  determined by the Board of  Directors,  which
          determination,  if  reasonable  and based upon the Board of Directors'
          good faith  business  judgment,  shall be binding upon the  registered
          holders) of the portion of the assets or evidences of  indebtedness so
          distributed  or of such  subscription  rights,  options,  warrants  or
          convertible  securities applicable to one share. Such adjustment shall
          be made  whenever  any  such  distribution  is made and  shall  become
          effective on the date of  distribution  retroactive to the record date
          for  the  determination  of  shareholders  entitled  to  receive  such
          distribution.

               (d) No  adjustment  in the  number  of  shares  of  Common  Stock
          purchasable  pursuant to the  Warrants  shall be required  unless such
          adjustment  would  require an  increase  or  decrease  of at least one
          percent in the number of shares of Common Stock then  purchasable upon
          the exercise of the Warrants;  provided,  however that any adjustments
          which by reason of this subsection 10.1(d) are not required to be made
          immediately  shall be carried  forward  and taken into  account in any
          subsequent adjustment.
 
               (e)  Whenever  the number of shares of Common  Stock  purchasable
          upon the  exercise of a Warrant is adjusted  as herein  provided,  the
          applicable Warrant Price payable upon exercise of the Warrant shall be
          adjusted by multiplying such Warrant Price  immediately  prior to such
          adjustment by the fraction, of which the numerator shall be the number
          of  shares of  Common  Stock  purchasable  upon the  exercise  of such
          Warrant  immediately  prior  to  such  adjustment,  and of  which  the
          denominator  shall  be  the  number  of  shares  of  Common  Stock  so
          purchasable immediately thereafter.
 
               (f) To the extent  not  covered  by  subsections  10.1 (b) or (c)
          hereof,  in case  the  Company  shall  sell or issue  Common  Stock or
          rights,  options,  warrants or convertible  securities  containing the
          right to subscribe  for or purchase  shares of Common Stock at a price
          per share (determined,  in the case of such rights, options,  warrants
          or convertible  securities,  by dividing (i) the total amount received
          or receivable by the Company in  consideration of the sale or issuance
          of such rights, options, warrants or convertible securities,  plus the
          total consideration payable to the Company upon exercise or conversion
          thereof,  by (ii) the total  number of shares  covered by such rights,
          options,  warrants  or  convertible  securities)  lower  than the then
          Current  Market  Price in  effect  immediately  prior to such  sale or
          issuance,  then the number of Shares  thereafter  purchasable upon the
          exercise of the Warrants shall be determined by multiplying the number
          of Shares  theretofore  purchasable upon exercise of the Warrants by a
          fraction, of which the numerator shall be the applicable Warrant Price
          and the denominator shall be that price calculated to the nearest cent
          determined  by  dividing  (I) an  amount  equal  to the sum of (A) the
          number of shares of Common Stock outstanding immediately prior to such
          sale or issuance  multiplied by the applicable Warrant Price, plus (B)
          the consideration  received by the Company upon such sale or issuance,
          by (II) the  total  number  of  shares  of  Common  Stock  outstanding
          immediately  after  such sale or  issuance.  For the  purpose  of such
          adjustments,  the Common  Stock which the holders of any such  rights,
          options,  warrants  or  convertible  securities  shall be  entitled to
          subscribe for or purchase shall be deemed issued and outstanding as of
          the date of such sale or issuance  and the  consideration  received by
          the Company therefore shall be deemed to be the consideration received
          by the  Company for such  rights,  options,  warrants  or  convertible
          securities,  plus the consideration or premiums stated in such rights,
          options,  warrants or convertible securities to be paid for the Common
          Stock covered thereby.  In case the Company shall sell or issue Common
          Stock  or  rights,   options,   warrants  or  convertible   securities
          containing  the right to subscribe for or purchase  Common Stock for a
          consideration  consisting, in whole or in part, of property other than
          cash or its  equivalent,  then in determining the "price per share" of
          Common  Stock and the  "consideration  received  by the  Company"  for
          purpose of the first sentence of this 
                                      5
<PAGE>

          subsection  10.1(f),  the Board of Directors  shall determine the fair
          value of said  property,  and such  determination,  if reasonable  and
          based upon the Board of Directors' good faith business judgment, shall
          be  binding  upon the  Warrantholder.  In  determining  the "price per
          share" of Common  Stock,  any  underwriting  discounts or  commissions
          shall not be deducted from the price received by the Company for sales
          of securities registered under the Securities Act.

               (g)  Whenever  the number of shares of Common  Stock  purchasable
          upon the  exercise  of a Warrant or the  Warrant  Price is adjusted as
          herein provided, the Company shall cause to be promptly mailed to each
          registered  holder of a Warrant by first class mail,  postage prepaid,
          notice of such  adjustment or  adjustments  and a  certificate  of the
          chief  financial  officer of the Company  setting  forth the number of
          shares of Common Stock  purchasable upon the exercise of a Warrant and
          the applicable Warrant Price after such adjustment,  a brief statement
          of the facts  requiring such  adjustment and the  computation by which
          such adjustment was made.

               (h) For the purpose of this Section 10, the term  "Common  Stock"
          shall mean (i) the class of stock  designated  as the Common  Stock of
          the Company at the date of this Agreement,  or (ii) any other class of
          stock resulting from successive  changes or  reclassification  of such
          Common Stock  consisting  solely of changes in par value,  or from par
          value to no par value, or from no par value to par value. In the event
          that at any time, as a result of an  adjustment  made pursuant to this
          Section 10, a registered  holder shall become entitled to purchase any
          securities  of  the  Company  other  than  Common  Stock,  (i)  if the
          registered  holder's right to purchase is on any other basis than that
          available to all holders of the Company's  Common  Stock,  the Company
          shall  obtain an opinion of an  investment  banking  firm valuing such
          other  securities  and  (ii)  thereafter  the  number  of  such  other
          securities  so  purchasable   upon  exercise  of  a  Warrant  and  the
          applicable  Warrant  Price  of such  securities  shall be  subject  to
          adjustment  from  time to time in a  manner  and on  terms  as  nearly
          equivalent as practicable to the provisions with respect to the Common
          Stock contained in this Section 10.

               (i) Upon the  expiration  of any  rights,  options,  warrants  or
          conversion  privileges,  if such  shall not have been  exercised,  the
          number of  shares  of Common  Stock  purchasable  upon  exercise  of a
          Warrant and the applicable  Warrant Price, to the extent a Warrant has
          not then been exercised shall, upon such expiration, be readjusted and
          shall  thereafter  be such as they  would  have  been  had  they  been
          originally adjusted (or had the original adjustment not been required,
          as the case may be) on the basis of (A) the fact that the only  shares
          of Common  Stock so issued  were the shares of Common  Stock,  if any,
          actually  issued or sold upon the  exercise of such  rights,  options,
          warrants or conversion  privileges,  and (B) the fact that such shares
          of Common  Stock,  if any,  were issued or sold for the  consideration
          actually   received  by  the  Company  upon  such  exercise  plus  the
          consideration,  if  any,  actually  received  by the  Company  for the
          issuance, sale or grant of all such privileges,  options,  warrants or
          conversion  privileges  whether or not exercised;  provided,  however,
          that no such  readjustment  shall  have the effect of  increasing  the
          applicable  Warrant  Price by an amount in excess of the amount of the
          adjustment initially made in respect of the issuance, sale or grant of
          such rights, options, warrants or conversion privileges.

          10.2 No Adjustment for  Dividends.  Except as provided in Section 10.1
     hereof,  no adjustment in respect of any dividends or distributions  out of
     earnings shall be made during the term of a Warrant or upon the exercise of
     a Warrant.

          10.3 No  Adjustment in Certain  Cases.  No  adjustments  shall be made
     pursuant  to  Section  10 hereof in  connection  with the  issuance  of the
     Warrants (or the underlying  shares of Common Stock).  No adjustments shall
     be made  pursuant  to  Section  10 hereof in  connection  with the grant or
     exercise of presently authorized or outstanding options to purchase, or the
     issuance  of shares  of  Common  Stock on the  exercise  thereof  under the
     Company's   1990  Stock   Option  Plan  and  1995  Stock  Option  Plan  for
     Non-Employee Directors.

          10.4   Preservation   of  Purchase   Rights   Upon   Reclassification,
     Consolidation,  etc. In case of any  consolidation  of the Company  with or
     merger of the Company  into another  corporation  or in case of any sale or
     conveyance to another  corporation  of the property,  assets or business of
     the Company as an entirety or substantially as an entirety,  the registered
     holders of the Warrants  shall have the right  thereafter,  upon payment of
     the Warrant Price in effect  immediately prior to such action, to purchase,
     upon  exercise  of each  Warrant,  the kind and  amount of shares and other
     securities  and property which it would have owned or have been entitled to
     receive  after  the  happening  of  such  consolidation,  merger,  sale  or
     conveyance  had  each  Warrant  been  exercised  immediately  prior to such
     action.  In the event of a merger described in Section  368(a)(2)(E) of the
     Internal  Revenue  Code of 1986,  as  amended,  in which the Company is the
     surviving  corporation,  the right to purchase shares of Common Stock under

                                       6
<PAGE>

     the Warrants  shall  terminate on the date of such merger and thereupon the
     Warrants  shall  become  null  and  void,  but  only  if  the   controlling
     corporation  shall agree to substitute  for the Warrants its warrants which
     entitle the holders  thereof to purchase  upon their  exercise the kind and
     amount of shares and other  securities  and property  which they would have
     owned  or  been  entitled  to  receive  had  the  Warrants  been  exercised
     immediately prior to such merger.  Any such agreements  referred to in this
     subsection  10.4 shall  provide for  adjustments,  which shall be as nearly
     equivalent as may be practicable to the adjustments provided for in Section
     10 hereof.  The provisions of this subsection 10.4 shall similarly apply to
     successive consolidations, mergers, sales or conveyances.

          10.5 Par Value of Shares of Common  Stock.  Before  taking  any action
     which would cause an adjustment reducing the applicable Warrant Price below
     the then par  value of the  Common  Stock  issuable  upon  exercise  of the
     Warrants,  the Company  will take any  corporate  action  which may, in the
     opinion of its counsel,  be necessary in order that the Company may validly
     and  legally  issue  fully  paid  and  nonassessable  Common  Stock at such
     adjusted applicable Warrant Price.

          10.6 Independent Public Accountants.  The Company may retain a firm of
     independent public  accountants of recognized  national standing (which may
     be any such firm regularly employed by the Company) to make any computation
     required under this Section 10 and a certificate  signed by such firm shall
     be conclusive  evidence of the  correctness of any  computation  made under
     this Section 10.

          10.7   Statement  on  Warrant   Certificates.   Irrespective   of  any
     adjustments  in the  applicable  Warrant  Price or the number of securities
     issuable upon exercise of Warrants,  Warrant  certificates  theretofore  or
     thereafter  issued may  continue  to  express  the same price and number of
     securities  as are stated in the  similar  Warrant  certificates  initially
     issuable pursuant to this Agreement.  However, the Company may, at any time
     in its sole discretion (which shall be conclusive),  make any change in the
     form of Warrant  certificate that it may deem appropriate and that does not
     affect  the  substance  thereof;  and any  Warrant  certificate  thereafter
     issued,  whether  upon  registration  of  transfer  of, or in  exchange  or
     substitution for, an outstanding Warrant certificate, may be in the form so
     changed.

          10.8 No Rights as Shareholder;  Notices to Holders of Warrants. If, at
     any time prior to the  expiration  of a Warrant and prior to its  exercise,
     any one or more of the following  events shall occur:  (a) any action which
     would require an adjustment  pursuant to subsection 10.1 or 10.4 hereof, or
     (b) a dissolution,  liquidation or winding up of the Company (other than in
     connection with a consolidation, merger or sale of its property, assets and
     business as an entirety or substantially as an entirety) shall be proposed:
     then  the  Company  shall  give  notice  in  writing  of such  event to the
     registered  holders of the Warrants,  as provided in Section 14 hereof,  at
     least 20 days prior (and pursuant to the  provisions of subsection  10.1(e)
     with respect to adjustments  pursuant to subsection 10.1(f) and 10.1(i)) to
     the date fixed as a record date or the date of closing the  transfer  books
     for  the  determination  of  the  shareholders  entitled  to  any  relevant
     dividend,  distribution,  subscription  rights  or other  rights or for the
     determination   of   shareholders   entitled  to  vote  on  such   proposed
     dissolution,  liquidation  or winding up. Such notice  shall  specify  such
     record date or the date of closing the transfer  books, as the case may be.
     Failure to mail or receive  such  notice or any  defect  therein  shall not
     affect the validity of any action taken with respect thereto.

     Section 11.  Fractional  Interests.  The  Company  shall not be required to
issue  fractional  shares of Common Stock on the  exercise of a Warrant.  If any
fraction of a share of Common Stock  would,  except for the  provisions  of this
Section  11, be issuable on the  exercise  of a Warrant  (or  specified  portion
thereof),  the Company  shall in lieu thereof pay an amount in cash equal to the
then Current  Market Price  multiplied  by such  fraction.  For purposes of this
Agreement, the term "Current Market Price" shall mean (i) if the Common Stock is
traded in the  over-the-counter  market  and not in the NASDAQ  National  Market
System nor on any  national  securities  exchange,  the average of the per share
closing  bid  prices of the  Common  Stock on the 30  consecutive  trading  days
immediately  preceding  the  date in  question,  as  reported  by  NASDAQ  or an
equivalent  generally accepted reporting service, or (ii) if the Common Stock is
traded  in  the  NASDAQ  National  Market  System  or on a  national  securities
exchange,  the average for the 30 consecutive trading days immediately preceding
the date in question of the daily per share  closing  prices of the Common Stock
in the NASDAQ National Market System or on the principal stock exchange on which
it is listed,  as the case may be. For purposes of clause (i) above,  if trading
in the Common Stock is not reported by NASDAQ, the bid price referred to in said
clause shall be the lowest bid price as reported in the "pink sheets"  published
by National  Quotation  Bureau,  Incorporated.  The closing price referred to in
clause (ii)

                                       7
<PAGE>

above  shall be the last  reported  sale price or, in the case no such  reported
sale takes place on such day, the average of the reported  closing bid and asked
prices,  in either case in the NASDAQ  National Market System or on the national
securities exchange on which the Common Stock is then listed.
 
     SECTION 12. Rights as  Warrantholders.  Nothing contained in this Agreement
or in any of the  Warrants  shall be construed  as  conferring  upon the holders
thereof,  as such, any of the rights of shareholders  of the Company,  including
without limitation,  the right to receive dividends or other  distributions,  to
exercise any  preemptive  rights,  to vote or to consent or to receive notice as
shareholders  in respect of the  meetings  of  shareholders  or the  election of
directors or the Company or any other  matter.  Anything  herein to the contrary
notwithstanding,  the Company shall cause copies of all financial statements and
reports,  proxy  statements  and  other  documents  as  it  shall  send  to  its
shareholders  to be sent by the  same  class  mail as sent to its  shareholders,
postage  prepaid,  on the  date of the  mailing  to such  shareholders,  to each
registered  holder of Warrants at his address  appearing on the Warrant Register
as of the record date for the determination of the shareholders entitled to such
documents.

     SECTION  13.  Notices.  All  notices,  requests  and  other  communications
pursuant to this Agreement shall be in writing and shall be  sufficiently  given
or made when delivered or three business days after deposit in the U.S. mail, by
first class mail, postage prepaid, addressed as follows:

          (a) if to the Company,  to (until  another  address is provided to the
     registered holders of the Warrants):

                           Rally's Hamburgers, Inc.
                           10002 Shelbyville Road, Suite 150
                           Louisville, Kentucky 40223
                           Attention: President

          (b) if to the registered  holder of a Warrant,  to the address of such
     holder as shown in the Warrant Register.
 
     SECTION 14.  Supplements and Amendments.  The Company may from time to time
supplement  or amend this  Agreement  without  the  approval  of any  holders of
Warrants  in  order  to cure any  ambiguity  or to  correct  or  supplement  any
provision contained herein which may be defective or inconsistent with any other
provision  herein,  or to make any other  provisions  in regard  to  matters  or
questions  arising  hereunder  which the Company may deem necessary or desirable
and which shall not be  inconsistent  with the  provisions of the  Warrants,  or
which  shall not  adversely  affect the  interests  of the  holders of  Warrants
(including  reducing the Warrant Price or extending the redemption or expiration
date).

     SECTION 15. Successors.  All the covenants and provisions of this Agreement
by or for the benefit of the Company or the  registered  holders of the Warrants
shall bind and inure to the benefit of their  respective  successors and assigns
hereunder.

     SECTION 16.  Governing Law. This Agreement shall be deemed to be a contract
made  under  the laws of the State of  Delaware  and for all  purposes  shall be
construed in accordance with the laws of said State.

     SECTION 17. Benefits of this Agreement.  Nothing in this Agreement shall be
construed  to give to any person or  corporation  other than the Company and the
registered holders of the Warrants any legal or equitable right, remedy or claim
under this Agreement. This Agreement shall be for the sole and exclusive benefit
of the Company and the registered holders of the Warrants.

     SECTION 18.  Counterparts.  This Agreement may be executed in  counterparts
and  each  of such  counterparts  shall  for all  purposes  be  deemed  to be an
original,  and all such counterparts  shall together  constitute but one and the
same instrument.

     SECTION 19. Descriptive  Headings.  The descriptive headings of the several
Sections of this  Agreement  are  inserted  for  convenience  only and shall not
control or affect the meaning or construction of any of the provisions hereof.


                                       8
<PAGE>

     IN WITNESS  WHEREOF,  the parties  have caused  this  Agreement  to be duly
executed, as of the day and year first above written.

                                   RALLY'S HAMBURGERS, INC.

                                   By:  /s/  Donald E. Doyle
                                        ---------------------------------
                                   Its:   President & C.E.O.
                                        ---------------------------------

                                   CKE RESTAURANTS, INC.

                                   By:  /s/  Andrew F. Puzder
                                        ---------------------------------
                                   Its:   Executive Vice President
                                        ---------------------------------

                                   FIDELITY NATIONAL FINANCIAL, INC.

                                   By:  /s/   Andrew F. Puzder
                                        --------------------------------
                                   Its:    Executive Vice President
                                        --------------------------------


                                        9
<PAGE>

WARRANT CERTIFICATE NO. 1                                       750,000 WARRANTS


                   WARRANT TO PURCHASE SHARES OF COMMON STOCK

                    VOID AFTER 5:00 P.M., NEW YORK CITY TIME,
                              ON DECEMBER 20, 1999

                            RALLY'S HAMBURGERS, INC.
              INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

     This certifies that, for value received, Fidelity National Financial, Inc.,
the registered holder hereof or assigns (the "Holder"),  is entitled to purchase
from  Rally's  Hamburgers,   Inc.,  a  Delaware   corporation  (the  "Company"),
commencing  December 20, 1997 until 5:00 p.m.,  New York City Time,  on December
20, 1999, at the purchase price per share of $4.375 (the "Warrant  Price"),  the
number of shares of Common Stock of the Company set forth above (the  "Shares").
The number of Shares  purchasable upon exercise of each Warrant evidenced hereby
and the Warrant Price per Share shall be subject to adjustment from time to time
as set forth in the Warrant Agreement referred to below.

     The  Warrants  evidenced  hereby  may be  exercised  in whole or in part by
presentation of this Warrant  certificate with the Purchase Form attached hereto
duly executed (with a signature  guarantee as provided thereon) and simultaneous
payment of the Warrant Price (subject to adjustment) at the principal  office of
the Company,  10002  Shelbyville  Road, Suite 150,  Louisville,  Kentucky 40223.
Payment  of such  price  shall be made at the option of the Holder in cash or by
certified  check or bank draft  payable to the  Company,  all as provided in the
Warrant Agreement.

     The Warrants evidenced hereby are part of a duly authorized issue of Common
Stock Purchase  Warrants with rights to purchase an aggregate of up to 1,500,000
Shares of Common  Stock of the  Company and are issued  under and in  accordance
with a Warrant Agreement dated as of December 20, 1996, between the Company, CKE
Restaurants,  Inc., and Fidelity National Financial, Inc. and are subject to the
terms and provisions  contained in such Warrant  Agreement,  to all of which the
Holder of this Warrant certificate by acceptance hereof consents.  A copy of the
Warrant  Agreement  may be obtained  for  inspection  by the Holder  hereof upon
written request to the Company.

     Upon any partial exercise of the Warrants evidenced hereby,  there shall be
issued to the Holder a new  Warrant  certificate  in respect of the Shares as to
which the  Warrants  evidenced  hereby  have not been  exercised.  This  Warrant
certificate  may be  exchanged at the office of the Company by surrender of this
Warrant  certificate  properly  endorsed  (with a  signature  guarantee)  either
separately or in combination  with one or more other Warrants or one or more new
Warrants to purchase the same  aggregate  number of Shares as were  evidenced by
the Warrant or Warrants exchanged.  No fractional Shares will be issued upon the
exercise of rights to  purchase  hereunder,  but the Company  shall pay the cash
value of any fraction  upon the exercise of one or more  Warrants.  The Warrants
evidenced hereby are transferable at the office of the Company in the manner and
subject to the limitations set forth in the Warrant Agreement.

     The  Holder  hereof may be treated  by the  Company  and all other  persons
dealing  with this  Warrant  certificate  as the  absolute  owner hereof for all
purposes and as the person entitled to exercise the rights  represented  hereby,
any notice to the contrary  notwithstanding,  and until such transfer is entered
on such  books,  the  Company  may treat the Holder  hereof as the owner for all
purposes.

     This Warrant  certificate  does not entitle the Holder hereof to any of the
rights of a stockholder of the Company.
 
Dated: December 20, 1996                RALLY'S HAMBURGERS, INC.


                                        By:  /s/
                                             -------------------------------

                                             -------------------------------
ATTEST:

-----------------------------

-----------------------------

                                       10
<PAGE>

WARRANT CERTIFICATE NO. 2                                       750,000 WARRANTS

 
                   WARRANT TO PURCHASE SHARES OF COMMON STOCK

                    VOID AFTER 5:00 P.M., NEW YORK CITY TIME,
                              ON DECEMBER 20, 1999

                            RALLY'S HAMBURGERS, INC.
              INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

     This  certifies  that,  for value  received,  CKE  Restaurants,  Inc.,  the
registered holder hereof or assigns (the "Holder"), is entitled to purchase from
Rally's  Hamburgers,  Inc., a Delaware  corporation (the "Company"),  commencing
December 20, 1997 until 5:00 p.m.,  New York City Time, on December 20, 1999, at
the  purchase  price per share of $4.375 (the  "Warrant  Price"),  the number of
shares of Common Stock of the Company set forth above (the "Shares"). The number
of Shares  purchasable  upon exercise of each Warrant  evidenced  hereby and the
Warrant Price per Share shall be subject to adjustment  from time to time as set
forth in the Warrant Agreement referred to below.

     The  Warrants  evidenced  hereby  may be  exercised  in whole or in part by
presentation of this Warrant  certificate with the Purchase Form attached hereto
duly executed (with a signature  guarantee as provided thereon) and simultaneous
payment of the Warrant Price (subject to adjustment) at the principal  office of
the Company,  10002  Shelbyville  Road, Suite 150,  Louisville,  Kentucky 40223.
Payment  of such  price  shall be made at the option of the Holder in cash or by
certified  check or bank draft  payable to the  Company,  all as provided in the
Warrant Agreement.

     The Warrants evidenced hereby are part of a duly authorized issue of Common
Stock Purchase  Warrants with rights to purchase an aggregate of up to 1,500,000
Shares of Common  Stock of the  Company and are issued  under and in  accordance
with a Warrant Agreement dated as of December 20, 1996, between the Company, CKE
Restaurants,  Inc., and Fidelity National Financial, Inc. and are subject to the
terms and provisions  contained in such Warrant  Agreement,  to all of which the
Holder of this Warrant certificate by acceptance hereof consents.  A copy of the
Warrant  Agreement  may be obtained  for  inspection  by the Holder  hereof upon
written request to the Company.

     Upon any partial exercise of the Warrants evidenced hereby,  there shall be
issued to the Holder a new  Warrant  certificate  in respect of the Shares as to
which the  Warrants  evidenced  hereby  have not been  exercised.  This  Warrant
certificate  may be  exchanged at the office of the Company by surrender of this
Warrant  certificate  properly  endorsed  (with a  signature  guarantee)  either
separately or in combination  with one or more other Warrants or one or more new
Warrants to purchase the same  aggregate  number of Shares as were  evidenced by
the Warrant or Warrants exchanged.  No fractional Shares will be issued upon the
exercise of rights to  purchase  hereunder,  but the Company  shall pay the cash
value of any fraction  upon the exercise of one or more  Warrants.  The Warrants
evidenced hereby are transferable at the office of the Company in the manner and
subject to the limitations set forth in the Warrant Agreement.

     The  Holder  hereof may be treated  by the  Company  and all other  persons
dealing  with this  Warrant  certificate  as the  absolute  owner hereof for all
purposes and as the person entitled to exercise the rights  represented  hereby,
any notice to the contrary  notwithstanding,  and until such transfer is entered
on such  books,  the  Company  may treat the Holder  hereof as the owner for all
purposes.

     This Warrant  certificate  does not entitle the Holder hereof to any of the
rights of a stockholder of the Company.

Dated: December 20, 1996           RALLY'S HAMBURGERS, INC.


                                   By:  /s/
                                        ---------------------------
ATTEST:

----------------------------

----------------------------


                                       11
<PAGE>


                      [Reverse Side of Warrant Certificate]

                            RALLY'S HAMBURGERS, INC.

                                  PURCHASE FORM

                                Mailing Address:
     Rally's Hamburger, Inc.
     10002 Shelbyville Road
     Suite 150
     Louisville, Kentucky  40223

     The undersigned hereby irrevocably elects to exercise the right of purchase
represented  by the within  Warrant  for and to purchase  thereunder,  _________
Shares of Common Stock provided for therein,  and requests that certificates for
such Shares be issued in the name of:

-------------------------------------------------------------------------------
and  if  said  number  of  Shares  shall  not  be  all  the  Shares  purchasable
hereunderthat  a  new  Warrant   certificate  for  the  balance  of  the  Shares
purchasable  under the within  Warrant  certificate be registered in the name of
the  undersigned  Holder or his Assignee as below indicated and delivered to the
address stated below.

Dated:________________________

Name of Holder or Assignee:

------------------------------
       (Please Print)

Address:
                                                                               
------------------------------

------------------------------                                               

Signature: 
          -------------------------------------------------------------- 
Note: The above  signature must  correspond with the name as it appears upon the
face of the within Warrant  certificate in every particular,  without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:

                                                                               
(Signature  must be guaranteed  by a bank or trust  company  having an office or
correspondent  in  the  United  States  or  by a  member  firm  of a  registered
securities exchange or the National Association of Securities Dealers, Inc.)


                                       12
<PAGE>

                                   ASSIGNMENT
 
                 (To be signed only upon assignment of Warrant)

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers the
right to purchase ________ Shares represented by the within Warrant  Certificate
unto, and requests that a Certificate for such warrant be issued in the name of

-------------------------------------------------------------------------------
(Name and Address of Assignee Must Be Printed or Typewritten)

hereby irrevocably constituting and appointing  ____________________ as Attorney
to  transfer  said  Warrants  on the books of the  Company,  with full  power of
substitution  in the premises  and, if said number of Shares shall not be all of
the Shares purchasable under the within Warrant certificate,  that a new Warrant
certificate for the balance of such Shares  purchasable under the within Warrant
certificate be registered in the name of the undersigned Holder and delivered to
such Holder's address as then set forth on the Company's books.

Dated:____________________________


                                             ----------------------------------
                                             Signature of Registered Holder

Note:  The  signature on this  assignment  must  correspond  with the name as it
appears upon the face of the within  Warrant  certificate  in every  particular,
without alteration or enlargement or any change whatever.

Signature Guaranteed:

-----------------------------------------
(Signature  must be guaranteed  by a bank or trust  company  having an office or
correspondent  in  the  United  States  or  by a  member  firm  of a  registered
securities exchange or the National Association of Securities Dealers, Inc.)





                                       13
<PAGE>

                                                                     Exhibit 4.6

     THIS FIRST  SUPPLEMENTAL  INDENTURE is made and entered into as of November
14, 1996 by and among  Rally's  Hamburgers,  Inc., a Delaware  corporation  (the
"Company"),  as Issuer,  Rally's of Ohio, Inc., Restaurant Acquisition Corp. and
Self-Service  Drive-Thru,  Inc., as  Subsidiary  Guarantors  (collectively,  the
"Subsidiary  Guarantors"),  and  PNC  Bank,  Kentucky,  Inc.,  as  Trustee  (the
"Trustee").  Capitalized terms not defined herein shall have the same meaning as
those ascribed to them in the Indenture (as defined below).


                                    RECITALS

     A. WHEREAS,  the Company,  the  Subsidiary  Guarantors  and the Trustee are
parties to that certain  Indenture  dated as of March 1, 1993 (the  "Indenture")
related to the  issuance by the Company of its 9 7/8% Senior  Notes due June 15,
2000 (the "Senior Notes");

     B.  WHEREAS,   an  amendment  to  Section  4.14  of  the   Indenture   (the
"Amendement")  has been duly  approved  by the  holders of the  Senior  Notes in
accordance with Article 9 of the Indenture;

     C.  WHEREAS,  the  Company  and the  Subsidiary  Guarantors  have taken all
necessary  corporate  action to duly authorize  their  respective  execution and
delivery of this First Supplemental Indenture; and

     D. WHEREAS, the Company has delivered to the Trustee the documents required
pursuant to Article 9 of the Indenture;

     NOW, THEREFORE,  in consideration of good and valuable  consideration,  the
receipt and sufficiency of which are hereby acknowledged, the parties agree, for
the benefit of each other and the holders of Senior Notes, as follows:


                                    ARTICLE I

          Section 1.01.  Notwithstanding  anything to the contrary  contained in
     the  Indenture,  Section  4.14 of the  Indenture  shall be  amended  in its
     entirety to read as follows:

          Section 4.14. Change of Control.

          If, at any time,  (i) an event or series of events occurs by which any
     Person or Group of Persons (other than GIANT GROUP LTD.,  Fidelity National
     Financial,  Inc.,  CKE  Restaurants,  Inc.,  or  any  of  their  respective
     affiliates)  shall, as a result of a tender or exchange offer,  open market
     purchases,   privately  negotiated  purchases,   merger,  consolidation  or
     otherwise,  have become the  beneficial  owner  (within the meaning of Rule
     13d-3 under the Exchange  Act) of 35% or more of the combined  voting power
     of then outstanding Voting Stock of the Company, (ii) the Company is merged
     with or into another  corporation  with the effect that  immediately  after
     such  transaction the stockholders of the Company hold less than a majority
     of the combined  voting power of the then  outstanding  Voting Stock of the
     Person  surviving  such  transaction,  (iii) the direct or  indirect  sale,
     lease,  exchange or other transfer to any Person or Group of persons of all
     or substantially all of the assets of the Company,  (iv) the liquidation or
     dissolution of the Company, or (v) any Person (other than Burt Sugerman and
     his  Affiliates)  shall,  as a result of a tender or exchange  offer,  open
     market purchases,  privately negotiated purchases, merger, consolidation or
     otherwise,  have become the  beneficial  owner  (within the meaning of Rule
     13d-3 under the Exchange  Act) of 35% or more of the combined  voting power
     of the then  outstanding  Voting  Stock of GIANT GROUP LTD. if at such time
     GIANT GROUP LTD. is the beneficial  owner (within the meaning of Rule 13d-3
     under the Exchange Act) of 25% or more of the combined  voting power of the
     then  outstanding  Voting Stock of the Company  (each a "Change of Control"
     and the time of such Change of Control being  referred to as the "Change of
     Control  Date"),  then the Company  shall  notify the Holders in writing of
     such  occurrence  and shall make an offer to  purchase  (as the same may be
     extended in accordance  with applicable law, the "Change of Control Offer")
     on a Business Day (the "Change of Control  Payment Date") not later than 60
     days following each Change of Control Date, all then outstanding Securities
     at a purchase  price equal to 101% of the  principal  amount  thereof  plus
     accrued and unpaid interest  thereon to the Change of Control Payment Date,
     if any. The Change of Control Offer shall be mailed by the Company not less
     than 30 days nor more than 45 days  before any  Change of  Control  Date to
     Holders of Securities at their last  registered  address with a copy to the
     Trustee  and the paying  Agent and shall set forth (a) notice that a 

                                       1
<PAGE>

     Change of Control  has  occurred  and that each Holder of  Securities  then
     outstanding  has the right to require  the Company to  purchase,  for cash,
     such  Holders  Securities  at 101% of the  principal  amount  thereof  plus
     accrued and unpaid interest  thereon to the Change of Control Payment Date,
     (b) the Change of Control  Payment Date, (c) a description of the Change of
     Control  and (d) a  description  of the  procedures  to be followed by such
     Holder in order to have its  Securities  purchased.  The  Change of Control
     Offer shall  remain open for not less than 30 days,  nor more than 45 days,
     and until the close of business on any such Change of Control Payment Date.
     If the Change of Control  Payment  Date is on or after an interest  payment
     record date and on or before the related Interest Payment Date, any accrued
     interest  will be paid to the person in whose name a Security is registered
     at the close of business on such record date,  and no  additional  interest
     will be payable to Holders who tender a Security  pursuant to the Change of
     Control Offer.
 
          The Company  shall  comply with Rule 14e-1 under the  Exchange Act and
     any other  securities laws and regulations  thereunder,  to the extent such
     laws and regulations are applicable,  in the event that a Change of Control
     occurs and the Company is required to offer to purchase Securities pursuant
     to this Section 4.14.

          On the Change of Control  Payment  Date,  the Company shall (x) accept
     for payment  Securities or portions thereof tendered pursuant to the Change
     of Control Offer, (y) deposit with the Paying Agent money sufficient to pay
     the purchase  price of all  Securities or portions  thereof so tendered and
     (z) deliver to the Trustee for cancellation Securities so accepted together
     with an  Officers'  Certificate  identifying  the  Securities  or  portions
     thereof  tendered to the Company.  The Paying Agent shall  promptly mail to
     the Holders of  Securities  so accepted  payment in an amount  equal to the
     purchase price and the Trustee shall promptly authenticate and mail to such
     Holders a new Security of the same series equal in principal  amount of any
     unpurchased portion of the Security surrendered."


                                   ARTICLE II

                             CONCERNING THE TRUSTEE

          SECTION 2.01. The Trustee  hereby  accepts the trusts hereby  declared
     and provided  and agrees to perform the same upon the terms and  conditions
     set  forth  in  the  Indenture  and in  this  First  Supplement  Indenture,
     including the terms and provisions defining and limiting the liabilities in
     the  performance of the trust created by the Indenture,  as supplemented by
     this First Supplemental Indenture.

          SECTION  2.02.  The  Trustee  shall not be  responsible  in any manner
     whatsoever  for or in respect of the validity or  sufficiency of this First
     Supplemental  Indenture  or the  due  execution  hereof  by  Issuer  of the
     Subsidiary Guarantors.

                                   ARTICLE 111

                                  MISCELLANEOUS

          SECTION  3.01.  Except as modified  herein,  the  Indenture  is in all
     respects confirmed.

          SECTION 3.02. This First Supplemental Indenture may be executed in any
     number of counterparts, and by the parties hereto in separate counterparts,
     each of which when so executed shall be deemed to be an original and all of
     which taken together shall constitute one and the same instrument.

          SECTION 3.03. This First  Supplemental  Indenture shall be governed by
     and  construed in  accordance  with the  internal  laws of the State of New
     York, without regard to the conflicts of laws rules thereof.


                                       2
<PAGE>

IN WITNESS WHEREOF,  the parties hereto have caused this Supplemental  Indenture
to be executed as of the day and year first above written. 

                                   RALLY'S, INC.

                                   By:    /s/ Donald E. Doyle
                                        --------------------------------------
                                             DONALD E. DOYLE
                                        Its: President, Chief Executive Officer

ATTEST:

/s/  Evan G. Hughes       (SEAL)
---------------------
     EVAN G. HUGHES
Its: Senior Vice President, Chief
     Administrative Officer and Secretary


                                   RALLY'S OF OHIO, INC.,
                                   as Subsidiary Guarantor

                                   By:  /s/ Michael E. Foss
                                        -------------------------------------- 
                                        MICHAEL E. FOSS
                                   Its: President Officer

ATTEST:

/s/  Evan G. Hughes       (SEAL)
---------------------
     EVAN G. HUGHES
Its: Secretary

                                     
                                   RESTAURANT ACQUISITION CORP.,
                                   as Subsidiary Guarantor

                                   By:  /s/ Michael E. Foss
                                        --------------------------------------
                                        MICHAEL E. FOSS
                                   Its: President

ATTEST:

/s/  Evan G. Hughes      (SEAL)
---------------------
     EVAN G. HUGHES
Its: Secretary

                                   SELF SERVICE DRIVE-THRU, INC.,
                                   as Subsidiary Guarantor

                                   By:  /s/ Michael E. Foss
                                        --------------------------------------
                                        MICHAEL E. FOSS
                                   Its: President

ATTEST:

/s/ Evan G. Hughes       (SEAL)
---------------------
     EVAN G. HUGHES
Its: Secretary
  
                                   PNC BANK, KENTUCKY, INC.,
                                   as Trustee
 
                                   By:  /s/ Jack R. Cornwall
                                        --------------------------------------
                                   Name:     JACK R. CORNWALL
                                   Title:    Assistant Vice President

ATTEST:

/s/ D.G. Metcalf       (SEAL)
---------------------
Name:    D.G. METCALF
Title:   Vice President

                                       3
                                      
<PAGE>


                                                                    Exhibit 10.5

                            RALLY'S HAMBURGERS, INC.
                             1990 STOCK OPTION PLAN


     1.  Purpose  of Plan.  The  purpose of this 1990  Stock  Option  Plan is to
promote  the  interest  of  Rally's  Hamburgers,   Inc.,  its  subsidiaries  and
stockholders,  by  encouraging  selected  key  employees of the  Corporation  to
acquire a  proprietary  interest in the  Corporation.  Such  investments  should
increase  the  personal  interest  and the  special  effort of such  persons  in
providing  for  the  continued  success  and  progress  of the  business  of the
Corporation and should enhance the  Corporation's  efforts to attract and retain
competent key employees.

     2.  Definitions.  The  following  terms  when used  herein  shall  have the
meanings set forth below,  unless a different meaning is plainly required by the
context:

          (a) Board. The Board of Directors of the Parent.

          (b) Code. The Internal Revenue Code of 1986, as it may be amended from
     time to time.  Reference  to any  section  of the Code  shall  include  any
     provision successor thereto.

          (c) Committee. The Committee provided for in Section 7.

          (d) Common Stock.  Shares of the Parent's common stock, par value $.10
     per share.

          (e) Corporation.  The Parent and its  "subsidiaries"  (as that term is
     defined in section 425(f) of the Code).

          (f) Disability.  Permanent and total disability  within the meaning of
     section 22(e)(3) of the Code.

          (g)  Employees.  Officers  and other key  management  personnel of the
     Corporation, as determined by the Committee from time to time.

          (h) Fair  Market  Value.  The fair  market  value of a share of Common
     Stock on a given date, as determined by the Committee;  provided,  however,
     that if the Common Stock on such date is (i) traded on the NASDAQ  national
     market  system,  the Fair Market  Value  shall be the closing  price of the
     Common Stock on such system;  or (ii) traded  on an established  securities
     exchange,  the Fair Market  Value shall be the closing  price of the Common
     Stock in the reported  consolidated trading of such exchange.  If there are
     no Common  Stock  transactions  reported for such date,  the  determination
     shall be made as of the last  immediately  preceding  date on which  Common
     Stock transactions were reported. If there shall be any material alteration
     in the present  system of  reporting  sales prices of Common Stock shall no
     longer be traded or listed as set forth above, the Fair Market Value of the
     Common Stock as of a particular date shall be determined  under such method
     as shall be determined by the Committee.

          (i) Incentive  Option.  An option defined in section 422A of the Code,
     which meets the requirements of Sections 5 and 6.

          (j) Non-Qualified Option. An option which is not an Incentive Option.

          (k) Option.  An Incentive Option or a Non-Qualified  Option granted to
     an Optionee pursuant to the Plan.

                  [REFLECTS AMENDMENTS THROUGH MAY ____, 1996]

                                       1
<PAGE>


          (l) Option Agreement.  A written agreement between the Corporation and
     an  Optionee  evidencing  the grant of an Option and  containing  terms and
     conditions concerning the exercise of the Option.

          (m)  Option  Price.  The price to be paid for  shares to be  purchased
     pursuant to the exercise of an Option.

          (n)  Optionee.  An  Employee  who has been  granted  an  Option or the
     personal  representative,  heir or legatee of an Optionee who has the right
     to exercise the Option upon the death of the Optionee.

          (o)Parent. Rally's Hamburgers, Inc., a Delaware corporation.

          (p) Plan.  This 1990 Stock Option Plan, as it may be amended from time
     to time.

     3. Eligibility and Participation. Persons eligible to receive Options under
the Plan shall be Employees who are selected by the  Committee.  In  determining
the  Employees  to whom  Options  shall be  granted,  the number of shares to be
covered by each Option and whether the  Options  shall be  Incentive  Options or
Non-Qualified  Options,  the Committee shall take into account the duties of the
respective Employees, their present and potential contribution to the success of
the Corporation,  their anticipated  number of years of active service remaining
and such other factors as it deems relevant in connection with accomplishing the
purposes of the Plan.  An Employee who has been granted an Option may be granted
an additional Option or Options as the Committee shall so determine.

     4. Shares Subject to the Plan. The stock to be offered under the Plan shall
be shares of Common  Stock,  which  shares may be  unissued  shares or  treasury
shares.  Subject to the  adjustments  provided  for in Section 8, the  aggregate
number of shares to be delivered upon exercise of all Options  granted under the
Plan shall not exceed 3,250,000  shares.  Shares of Common Stock subject to, but
not delivered  under, an Option  terminating or expiring for any reason prior to
its  exercise  in full  shall be deemed  available  for  Options  to be  granted
thereafter during the term of the Plan.

     5. Terms and Conditions of Options.  All Options granted hereunder shall be
subject to the following terms and conditions:

          (a) To Whom Options May Be Granted.  Options  shall be granted only to
     Employees.  In the case of Incentive Options,  Options shall not be granted
     to any Employee who immediately  after the granting of an Incentive  Option
     under  the Plan owns more than 10% of the  issued  and  outstanding  Common
     Stock unless such  Incentive  Option is granted at 110% of the Value of the
     Common  Stock at the time of the  grant of the  Incentive  Option.  For the
     purpose  of this  Section  5(a) (and  Section  6(d)),  consistent  with the
     provisions  of section  425(d) of the Code,  an Employee is  considered  as
     owning all of the Common  Stock  owned by his  brothers,  sisters,  spouse,
     ancestors and lineal descendants and his pro rata share of all Common Stock
     owned by corporations,  partnerships, estates and trusts in which he has an
     interest.

          (b)   Non-Transferability   of  Option.   The  Option   shall  not  be
     transferable  by the  Optionee  otherwise  than by  bequest  or the laws of
     descent and  distribution,  and shall be exercisable  during the Optionee's
     lifetime only by the Optionee.

          (c) Termination of Option Upon Termination of Employment.  (i) Subject
     to Section 5(c)(ii),  if the Optionee's employment by the Corporation shall
     terminate for any reason other than death,  Disability or  termination  for
     cause,  the Option shall  terminate six months (three months in the case of
     an Incentive Option) after the Optionee's employment terminates (unless the
     Optionee dies during such period),  or on the Option's  expiration date, if
     earlier,  and shall be exercisable  during such period after termination of
     employment only with respect to the number of shares which the Optionee was
     entitled to purchase on the day preceding the termination of the Optionee's
     employment,  except that the Committee may, in specific  cases,  and in its
     sole  discretion,  permit exercise by an Optionee of all, or a part of, the
     unexercised Option within the period referred to above after the Optionee's
     employment terminates. If the Optionee's employment shall terminate because
     of  discharge  for cause,  the Option  

                                       2
<PAGE>

     shall   terminate   on   the   date   of  the   Optionee's   discharge.(ii)
     Notwithstanding Section 5(c)(i), the Committee may, in its discretion, vary
     the  foregoing   provisions  with  respect  to  a  particular  Optionee  or
     particular  Options  granted  to  such  Optionee  to make  the  termination
     provisions  applicable to such Optionee more  favorable to such Optionee so
     long as such variation does not extend the expiration date of such Options.
     Any such variation shall be set forth in the applicable Option Agreement or
     an amendment thereto.

          (d)  Termination of Option Upon Death or  Disability.  In the event of
     the Optionee's  death or Disability while in the employ of the Corporation,
     or Optionee's death within six months (three months in case of an Incentive
     Option) after the termination of the Optionee's  employment  (other than by
     reason of discharge for cause) the Option shall terminate upon the earliest
     to  occur of  (i) 12  months  after  the  date of the  Optionee's  death or
     Disability  or  such  other  date  as  shall  be  specified  in the  Option
     Agreement,  or  (ii) the  Option's  expiration  date.  The Option  shall be
     exercisable  during such period after the  Optionee's  death or  Disability
     with respect to the number of shares as to which the Option shall have been
     exercisable on the date preceding the  Optionee's  death or Disability,  as
     the case may be.

          (e) Limitation on Incentive Option. If the aggregate value (determined
     at the time the  Option is  granted)  with  respect  to which  Options  are
     exercisable  for the first time by an  Optionee  during any  calendar  year
     under the Plan or any other plan of the Corporation exceeds $100,000,  then
     notwithstanding  anything contained herein, such Option shall be treated as
     a Non-Qualified Option to the extent of the excess.

     6. Other Terms and  Conditions of Option  Agreements.  The Committee  shall
have the power,  subject to the limitations  contained in the Plan, to prescribe
any terms and conditions regarding the grant or exercise of any Option under the
Plan and in particular  shall prescribe the following terms and conditions which
shall be contained in the Option Agreement for all Options:

          (a) Type of Option.  Whether  the Option is an  Incentive  Option or a
     Non-qualified Option.

          (b) Number of Shares of Common  Stock.  The number of shares of Common
     Stock to which it pertains.

          (c) Exercise Price. The exercise price of the Option,  which shall not
     be less than 100% of the Fair Market  Value of the Common Stock at the time
     of the grant of an  Incentive  Option,  except  as  otherwise  provided  in
     Section 5(a).

          (d) Term of Option. The term of the Option,  which shall not exceed 10
     years from the date on which the  Option is  granted,  unless the  Optionee
     owns more than 10% of the issued and  outstanding  Common  Stock,  in which
     case the term shall not exceed five years.

          (e) How Exercised.  The method or time when the Option may be exercise
     in whole or in part,  including,  but not  limited  to,  whether  it may be
     exercised by delivery of previously owned shares of common Stock.  However,
     in no event shall an Option be exercisable within six months of the date of
     grant in the case of an Optionee subject to Section 16(b) of the Securities
     Exchange Act of 1934, as amended (the "Exchange Act").

          (f) Withholding of Taxes. For a Non-Qualified  Option,  the provisions
     for the withholding of Federal, state and local income or other taxes which
     are due in connection with the exercise of the Non-Qualified Option.
 
     7.  Administration.  The  Plan  shall  be  administered  by  the  Committee
appointed by the Board which shall consist of two or more disinterested  persons
(within  the meaning of Rule 16b-3  promulgated  pursuant  to the  Exchange  Act
("Rule  16b-3")).  In accordance with and subject to the provisions of the Plan,
the Committee  shall have full power and  authority to interpret the  provisions
and supervise the administration of the Plan. All decisions,  determinations and
selections made by the Committee pursuant to the provisions of the Plan shall be
final. Each Option granted shall be evidenced by an Option Agreement  containing
such terms and  conditions  as may be approved by the  Committee and which shall
not be inconsistent with the Plan.

                                       3
<PAGE>

     8.  Adjustments  Upon  Changes  in  Capitalization.   Notwithstanding   the
limitations  set forth in  Section  4, in the event of a merger,  consolidation,
reorganization,  stock  dividend,  stock  split or  other  change  in  corporate
structure or capitalization affecting the Common Stock, the Committee shall make
an appropriate  adjustment in the maximum number of shares  available  under the
Plan or to any one  individual  and in the  number,  kind and Option  Price,  of
Common Stock  subject to Options  granted  under the Plan.  Any such  adjustment
regarding  an  Incentive  Option  shall  be  made  so as  not  to  constitute  a
modification, extension or renewal of the Incentive Option within the meaning of
Section 425(h) of the Code.

     9.  Time of  Granting  Options.  Nothing  contained  in the  Plan or in any
resolution  adopted or to be adopted by the Board or by the  stockholders of the
Parent,  and no action  taken by the  Committee  (other  than the  granting of a
specific  Option),  shall  constitute the granting of an Option  hereunder.  The
granting  of an Option  pursuant  to the Plan  shall take place only on the date
such Option is approved by the Committee.

     10. Amendment and Discontinuance.  The Board may discontinue,  amend, alter
or suspend the Plan; provided, however, that any amendment requiring stockholder
approval  under Rule 16b-3,  as in effect  from time to time,  shall not be made
without  obtaining such approval.  Unless amended in accordance with the amended
Plan with the consent of the Optionee, any Option which is outstanding under the
Plan at the time of its  amendment  or  termination  shall  remain  in effect in
accordance with its terms and conditions and those of the Plan as in effect when
the Option was granted.

     11.  Merger, Consolidation, Etc.

          (a)  Conversion  on  Merger.  In the event the  Corporation  merges or
     consolidates with another  corporation,  or all or substantially all of the
     Corporation's  capital stock or assets are required by another corporation,
     and the  surviving or acquiring  corporation  issues shares of its stock to
     the Corporation's shareholders in connection with the merger, consolidation
     or acquisition, the surviving or acquiring corporation shall adopt the Plan
     and, upon the exercise of an Option,  the Optionee  shall, at no additional
     cost (other than the Option Price), be entitled to receive,  in lieu of the
     number of shares of Common Stock to which such Option is then  exercisable,
     the  number and class of shares of stock or other  securities  to which the
     Optionee  would have been  entitled  pursuant  to the terms of the  merger,
     consolidation or acquisition if immediately  prior thereto the Optionee had
     been the holder of record of the number of shares of Common  Stock equal to
     the number of shares of Common  Stock as to which the Option  shall then be
     exercisable.

          (b)  No  Conversion  on  Certain  Mergers.   In  the  event  that  the
     Corporation  merges or  consolidates  with another  corporation,  or all or
     substantially all of the Corporation's capital stock or assets are acquired
     by another corporation, and the surviving or acquiring corporation does not
     issue shares of its stock to the  Corporation's  shareholders in connection
     with the merger,  consolidation or acquisition,  then,  notwithstanding any
     other  provision  of the Plan to the  contrary,  no Option may be exercised
     after the effective date of the merger, consolidation or acquisition.

     12.  Effectiveness and Termination of the Plan.

          (a) Effective  Date. The Plan shall become  effective upon adoption by
     the Board.  The Plan shall be rescinded and all Options  granted  hereunder
     shall  be null  and  void  unless  within  12  months  from the date of the
     adoption  of the Plan by the  Board  it shall  have  been  approved  by the
     holders  of  a  majority  of  the  outstanding   Common  Stock  present  or
     represented and entitled to vote on the Plan at a stockholders' meeting.

          (b)  Termination  Date.  The Plan shall  terminate  on the earliest to
     occur of (i) the date when all the Common  Stock  available  under the Plan
     shall have been acquired  through the exercise of Options granted under the
     Plan,  (ii) 10 years after the date of adoption of the Plan by the Board or
     (iii) such other date as the Board may determine.

     13.  Governing  Law.  The  provisions  of  the  Plan  shall  be  construed,
administered and enforced  according to the laws of the Commonwealth of Kentucky
and  shall be  construed  in such a fashion  that all  Incentive  Options  shall
qualify as "incentive  stock options"  within the meaning of section 422A of the
Code.

                                       4
<PAGE>

     14. Replacement  Options.  The Committee may permit the voluntary surrender
of all or a portion of any Option granted under the Plan,  conditioned  upon the
granting  of the  Optionee  of a new  Option  under  the  Plan  for the  same or
different number of shares as the Committee may determine.  The new Option shall
be  exercisable  at such price,  during such period and in accordance  with such
other terms and conditions as the Committee may determine,  consistent  with the
provisions of the Plan, without regard to the price, period of exercise or other
terms or conditions of the Option surrendered.


ORIGINALLY ADOPTED: August 8, 1990
[Reflects amendments through May __, 1996]



                                        Rally's Hamburgers, Inc.


                                        By:  /s/  Donald E. Doyle
                                             ---------------------------------
                                             Chairman & CEO


                                       5
<PAGE>
                                                                   Exhibit 10.12

                             SUPPLEMENTAL AGREEMENT

     This Supplemental Agreement (this "Supplement") is made and entered into as
of the 11th day of February  1997 by and between  RALLY'S  HAMBURGERS,  INC.,  a
Delaware corporation (the "Company:"), and DONALD E. DOYLE (the "Executive").

     RECITALS:

     The parties hereto have previously  entered into each of (i) the Employment
Agreement,  dated March 1, 1996 (the "Employment  Agreement"),  (ii) the Rally's
Inc. Non-Qualified Stock Option Agreement, dated March 18, 1995 [sic] (the "NQSO
Agreement")  and (iii) the  Rally's  Hamburgers,  Inc.  Incentive  Stock  Option
Agreement,  dated  March 18,  1996 (the "ISO  Agreement").  The  Company and the
Executive  wish to amend certain  provisions of the Employment  Agreement,  NQSO
Agreement and ISO  Agreement as provided in this  Supplement  following  certain
discussions and correspondence between them.

     NOW, THEREFORE, in consideration of the agreements contained herein and for
other  good  and  valuable  consideration,   the  receipt  of  which  is  hereby
acknowledged, the Executive and the Company hereby agree as follows:

     AGREEMENT

     1.   At all times during the Term (as defined in the Employment  Agreement,
          as  modified  by  this  Supplement)  Executive  shall  report  to  the
          Executive  Committee  of the Board of  Directors  of the Company  (the
          "Executive  Committee")  or to  any  member  thereof  designated  by a
          majority of the Executive  Committee.  The  Executive  shall have such
          powers  and  duties  as the  Executive  Committee  or such  designated
          memeber shall  prescribe from time to time,  provided that such duties
          are consistent  with the  Executive's  position as President and Chief
          Executive Officer of the Company.

     2.   Notwithstanding Section 1 of the Employment Agreement to the contrary,
          the  Company  may  terminate  the  Executive's  employment  under  the
          Employment  Agreement at any time without  cause or notice of any kind
          whatsoever,  it being the  intention of the parties  that  Executive's
          employment  under  the  Employment   Agreement  as  modified  by  this
          Supplement will be on an "at will" basis.  The Term (as defined in the
          Employment  Agreement,  as modified by this  Supplement)  shall end on
          March 17, 1998 or upon any prior termination of Executive's employment
          under the Employment Agreement as modified by this Supplement.

     3.   (a)If the Company shall  terminate the  Executive's  employment  other
          than for cause,  death or Disability (as defined in the Rally's,  Inc.
          1990 Stock Option Plan, as amended (the "Plan")),

          (i)  Company shall pay to the  Executive  his Base Salary  through the
               end of the month in which such termination occurs at the rate and
               at such times such Base Salary would  otherwise be payable  under
               the Employment Agreement as if such termination had not occurred,

          (ii) the  Executive  may  exercise  the  Option  granted  in the  NQSO
               Agreement (the "NQSO  Option") (A) at any time  occurring  before
               the Termination Date (as defined in the NQSO  Agreement),  to the
               extent of all Option Shares (as defined in the NQSO Agreement) as
               to which the NQSO Option becomes  exercisable by the Executive on
               March 19, 1997,   as  if  such   termination  of  employment  (if
               applicable)  had  not  occurred,  and (B) at any  time  occurring
               before  the  Termination  Date with  respect  to such  additional
               Option Shares as to which the NQSO Option becomes  exercisable by
               the  Executive  on  March 19,  1998,  as if such  termination  of
               employment (if applicable) had not occurred; and

                                       1
<PAGE>

          (iii)subject to the provisions of Section 6 of the ISO Agreement,  the
               Executive  may exercise the Option  granted in the ISO  Agreement
               (the "ISO Option") at any time occurring  before the  Termination
               Date (as  defined  in the ISO  Agreement),  to the  extent of all
               shares as to which such ISO  Option  becomes  exercisable  by the
               Executive on March 19, 1997, as if such termination of employment
               (if applicable) had not occurred; and

          (iv) the NQSO Option and the ISO Option shall each vest on, and become
               exercisable on, the date of such termination of employment to the
               extent  set  forth in  clauses  (ii) and (iii)  above;  provided,
               however,  this Section 3 shall not be  interpreted  to reduce the
               number of shares  subject  to either  the NQSO  Option or the ISO
               Option  if  the  Company  does  not  terminate  the   Executive's
               employment other than for cause, death or Disability.

          (b) For purposes of this Section 3, "cause" shall mean (i) the willful
          engaging by the  Executive  in gross  misconduct  which is  materially
          injurious to the Company,  (ii)  conviction of a felony  involving any
          financial  impropriety  or which would  materially  interfere with the
          Executive's  ability  to  perform  his  services  required  under  the
          Employment  Agreement (as modified  hereby) or otherwise be materially
          injurious  to  the  Company,  or  (iii)  the  willful  refusal  of the
          Executive  to  perform  in a  material  respect  any of  his  material
          obligations  under  the  Employment  Agreement  (as  modified  hereby)
          without proper  justification after being notified with specificity by
          the Board of  Directors  of the  Company in writing of the  particular
          respects in which the Board of Directors  asserts  that the  Executive
          has not  performed  such  material  obligations.  For purposes of this
          Section 3, no act, or failure to act, on the Executive's part shall be
          considered  willful  unless  done,  or  admitted  to be  done,  by the
          Executive in bad faith and without  reasonable belief that such action
          or omission was in the best interests of the Company.

     4.   Except as provided in Section 3 above,  following a termination of the
          Executive's  employment without cause by the Company,  (i) the Company
          shall have no obligations under the Employment  Agreement,  including,
          without  limitation,  any obligation  thereunder to pay Base Salary or
          other  compensation  or to provide other benefits except to the extent
          otherwise  provided by law, and (ii) the Executive shall have no right
          to exercise the NQSO Option or the ISO Option.

     5.   To the extent the terms of this  Supplement  shall conflict with or be
          inconsistent  with  the  terms  of  Employment  Agreement,   the  NQSO
          Agreement,  the ISO  Agreement  or the Plan,  the terms  hereof  shall
          control as between the parties hereto.  Except to the extent the terms
          of this Supplement conflict with or are inconsistent with the terms of
          Employment  Agreement,  the NQSO  Agreement,  the ISO Agreement or the
          Plan,  the terms and conditions of each thereof are confirmed in their
          entireties  as  controlling  between  the  parties  hereto  as if this
          Supplement   had  not  been  executed.   Without   limitation  to  the
          immediately  preceding  sentence,  (i)  Sections  4  and  4.1  of  the
          Employment  Agreement  are hereby  confirmed,  and (ii) the  Company's
          right to terminate Executive's employment without cause provided under
          Section 2 hereof  shall be in addition to, and not in  limitation  on,
          the  Company's  other rights to terminate the  Executive's  employment
          provided in the  Employment  Agreement.  The parties  acknowledge  and
          agree that the correct date of the NQSO  Agreement is March 18,  1996,
          not  March 18,  1995,  and the text of the NQSO  Agreement  is  hereby
          amended to reflect such correction.

     6.   This  Supplement  will be effective as of the date first written above
          upon the execution and delivery hereof by each party hereto.

                                       2
<PAGE>

     IN WITNESS WHEREOF,  the Company, by its duly authorized  officer,  and the
Executive  have  executed and  delivered  this  Supplement  as of the date first
written above.


Date:     2/21/97                            RALLY'S HAMBURGERS, INC.
     --------------------------------

                                             By:  /s/ Terry Christensen
                                                ------------------------------

                                             Title:    Member Board of Directors
                                                  ------------------------------

Date:     2/21/97                            /s/ Donald E. Doyle
     --------------------------------   ---------------------------------------
                                                    DONALD E. DOYLE



                                        3
<PAGE>

                                                                   Exhibit 10.16

                              CONSULTING AGREEMENT

     THIS CONSULTING AGREEMENT  ("Agreement") is made and entered into as of the
1st day of October,  1996, by and between RALLY'S  HAMBURGERS,  INC., a Delaware
corporation  ("Rally's"),  and CKE  RESTAURANTS  INC.,  a  Delaware  Corporation
("Consultant").
 
     RECITALS:

     A. Rally's is engaged in the operation and franchising of double drive thru
quick service restaurants (the "Business").
 
     B.   Consultant  has  valuable   experience  and  expertise  in  restaurant
operation.

     C. Rally's desires to engage  Consultant in order to secure for Rally's the
benefit of Consultant's experience, efforts and abilities in connection with the
Business,  and  Consultant  desires to be  engaged by Rally's in such  capacity,
pursuant to the terms and conditions of this agreement.

     NOW, THEREFORE, Consultant and Rally's hereby agree as follows:

     1. Terms of Agreement.  Rally's hereby engages  Consultant,  and Consultant
hereby accepts such  engagement  and agrees to serve  Rally's,  on the terms and
conditions  set  forth  herein  for a term  commencing  on the date  hereof  and
expiring February 28, 1997 (the "Term"), unless mutually extended.

     2. Duties; Standards.

          2.1. Duties.  Consultant shall assist and advise Rally's in connection
     with Rally's operation of the Business.  Without limiting the generality of
     the  foregoing,  Consultant  shall  work  on  those  projects  assigned  to
     Consultant from time to time by the Chief  Executive  Officer and President
     of Rally's, to whom Consultant shall report during the Term.

          2.2.  Standard  of  Services.  During the Term,  Consultant  shall (a)
     devote  such time and  energy to the  duties  requested  of  Consultant  in
     connection herewith as reasonable determined by Consultant and Rally's (not
     to exceed 10 days  during  any month of the Term) and (b) use  Consultant's
     reasonable efforts, skill and abilities to promote Rally's interests.

     3. Compensation.
 
          3.1. Base  Compensation.  For the Term,  Rally's shall pay  Consultant
     base  compensation  in the  amount of  $15,000,  which  shall be payable on
     February 28, 1997.  If this  Agreement is mutually  extended,  then Rally's
     shall pay base  compensation  to  Consultant  in the amount of $3,000  each
     month,  which  shall be  payable  in  arrears on the first day of the month
     following the month for which such compensation is payable.

          3.2. Expenses.  In addition to such base  compensation,  Rally's shall
     reimburse  Consultant for all ordinary and necessary  expenses  incurred by
     Consultant in the performance of duties  hereunder,  provided such expenses
     are  approved  by  Rally's  in  advance  and  thereafter  accounted  for in
     accordance with Rally's policies.

     4.  Independent  Contractor  Relationship.  In all matters  related to this
Agreement, Consultant shall be deemed to be acting as an independent contractor.
Consultant  shall have no authority to act for or otherwise  bind Rally's in any
matter  whatsoever.  This Agreement shall not be construed as  establishing  any
joint venture,  partnership, or any other business entity between Consultant and
Rally's.
 
                                       1
<PAGE>

     5.  Confidentiality.  In the  provision  of services  hereunder  Consultant
acknowledges  that it will be provided and will otherwise have access to certain
information about the properties, operations, financial conditions and prospects
of Rally's  that is  non-public,  confidential  or  proprietary  in nature  (the
"Confidential   Information").   Consultant  agrees  to  use  such  Confidential
Information only in the performance of its services to Rally's hereunder and not
to disclose any Confidential  Information to any other person or entity,  except
for those  employees of  Consultant  who actually  will be  performing  services
hereunder. The term Confidential Information shall not include information which
(i) is or becomes generally  available to the public other than as a result of a
disclosure by Consultant or Consultant's employees,  officers or directors, (ii)
was available to Consultant on a non-confidential  basis from a source which was
not known by  Consultant.  after due inquiry,  to be bound by a  confidentiality
agreement or other obligation of confidentiality with or to Rally's prior to its
disclosure  by  Rally's,   or  (iii)  becomes   available  to  Consultant  on  a
non-confidential  basis from a source other than  Rally's  which is not known by
Consultant,  after due inquiry,  to be bound by a  confidentiality  agreement or
other obligation of confidentiality with or to Rally's.

     6. Miscellaneous.

          6.1. Entire Agreement. This Agreement constitutes the entire Agreement
     between the parties  concerning its subject matter. It supersedes all prior
     or written or contemporaneous oral agreements, correspondence, arrangements
     and understandings related to its subject matter.

          6.2.  Captions.  All captions in this Agreement are intended soley for
     the  convenience  of the  parties,  and none  shall be deemed to affect the
     meaning and construction of any provision hereof.

          6.3. Amendment and  Modifications.  No amendment or other modification
     to this  Agreement  shall be  binding  upon any party  unless  executed  in
     writing by all of the parties hereto.

          6.4.  Assignment.  Consultant  may not assign or delegate or otherwise
     transfer any of Consultant's  rights or obligations under this Agreement to
     any other person or entity without  obtaining the prior written  consent of
     Rally's.

          6.5.  Binding Effect.  This Agreement shall be binding upon, and shall
     inure to the benefit of and be enforceable  by, the parties  hereto,  their
     successors and assigns.

IN WITNESS WHEREOF, Rally's, by its duly authorized officer, and Consultant have
executed and delivered this Agreement on the date first written above.

                                        RALLY'S HAMBURGERS, INC.

                                        By:  /s/ Donald Doyle
                                        Title:  President & CEO

                                        CKE RESTAURANTS, INC.

                                        By:  /s/ C. Thomas Thompson
                                        Title:    President, C.O.O.

                                       2